OT: Social Security

Fauntleroy - Not exactly correct on SS taxation. You don’t pay any Fed taxes on the first $32K of income from any source for older couples. Then you pay on 50% of SS income from $34K to $44K then it transitions to 85% at some point. It still sucks but not as bad as you indicate.

If you are lucky, you can live in a state that taxes SS also like I do.

Hal, your employee earnings this year will count against you as you haven’t yet reached Full Retirement Age.

Basically, your benefit is reduced one dollar for every two dollars of earnings above the threshold. It is very likely your work through May will render your actual benefit greatly reduced and perhaps eliminated for this calendar year.

I saw this often with clients that worked a partial year and had not yet attained their Full Retirement Age. As a practice, we started counseling such clients not to file for Social Security until after they had stopped working. Often, we also suggested they not apply for benefits until January 1 of the year after they stopped working if they were projected to suffer an income/benefit offset. We also recommended people interview with Social Security before filing as they can provide a specific benefit projection of any offset based on your expected income. This proved to be a great planning tool to determine when to file.

You may want to reconsider your retirement date and withdraw your Social Security benefit application. Work a bit longer and then file for SS next January 1. At that time you can state you are no longer working and if you have no further employee earnings then the offset would not apply. A caveat is that if you receive any kind of incentive pay in the new calendar year, it will be subject to the income/benefit offset calculation.

The income/benefit offset works in two ways.

In every calendar year prior to attaining Full Retirement Age it is a reduction of one dollar of benefit for every two dollars of earnings over the offset allowance, which is $22,300 in 2024. In the calendar year in which you attain Full Retirement Age the ratio is one to three above an higher earnings threshold. After the actual attainment of Full Retirement Age, there is no income/benefit offset.

Mumbo is correct regarding the restoration of any benefit offset. At the attainment of Full Retirement Age the amount of benefit that was reduced will be actuarily calculated based on future life expectancy and the current benefit will be slightly increased. So the previously reduced benefit will then be spread out over the rest of your expected life. So let’s say you had a $1,000 benefit reduction and you reach Full Retirement Age at 66&1/2, and have a life expectancy of 180 months. The $1,000 will be basically divided by 180 and the resulting amount will be paid each month…so about $5 per month. If you outlive the expected period, you gain a little. However, if you pass within the expected period, you suffer an actual loss of benefit.

In my opinion, the benefit reduction is draconian in that you lose the money all at once and then have to outlive the life expectancy tables to gradually get it back over a very long period of time. For that reason, care should be taken to mitigate the reduction. If you know you will have an income/benefit offset, then it is best to defer filing for Social Security until you know you will not suffer the offset.

Hal, if you know your benefit will be reduced, you should consider retracting your application and then refile at a later date after the possibility of a reduction. Your projected normal benefit amount goes up each month, but once you file, it is frozen at that amount. If you are offset the balance of this year that is losing 7 monthly increases in your normal benefit amount. And then you suffer a reduction because of employment income. A double whammy. It is much better to defer filing until you know you will not suffer a benefit reduction. Your social security office can show you what your projected benefit will be based on a filing month on a spreadsheet based on your records. The difference is not trivial.

Rather than waiting on a letter, I would call the representative immediately and ask if you can retract your application. There will be a deadline after which you won’t be able to retract and then refile. Find out what that is so that you retain the option.

Hal, once you qualify for retirement benefits you have 12 months to rescind your election and then re-apply at a later date. You can only do this once. If you have received any benefit in the 12month period you have to pay it back before SS accepts your change.

If you defer your SS benefit to get past your offset period, from what you report, it looks like you have a short term hole in your budget. There may be several different methods to fill in this gap without negatively affecting your long term social security benefits.

Since you are in a good mood now, you will need to look at your taxes next year, hehe. This year should take care of itself since you are working half the year.

You will move into the world of figuring out what to have withheld for federal taxes (W-4V, separate form you have to mail in) with only a few % choices. They do not do state taxes. I think PA exempts SS from state tax, I am not so lucky and have to pay estimated taxes in MN since no withholding.

Just trying to keep you in a good mood…

If you used software, it is probably correct. Joint returns can make it more complicated. Her income probably is enough to push your SS tax to the maximum level since it is calculated based on the other income.

We have no earned income and the percentage varies, getting closer to 85% every year. It is a terrible system as the tax rates go up also as the 50->85% transition kicks in so the incremental effective tax rate is higher than you expect.

Problem resolved!

I called my local office and talked to a very helpful person who went through my application line by line and found the problem. Basically I had put down that I was working through the end of May, and that I wanted my first payment in June--so there was overlap cuz SS is a month behind. He reset me to start benefits in June with first payment in July--voila, problem vanished and I'm approved.

I'm amazed...an actual Govt. employee who was helpful (snark). Life is good.

Congrats to all of you who figured out the nuances of SS. It certainly is a challenge. For me, I fully retired from working when I was 60 so I had 2 years before applying for SS and 5 years of picking up the total cost of health insurance before Medicare. Pricey but not complicated.