Social Security and Retirement Benefits
For most people, the younger you are, the less you think about Social Security. If you are in your 40’s, 50’ or 60’s, the retirement benefits start gaining more importance.
The early death of a parent or spouse can also trigger a need to learn more.
That’s when the questions and tax implications begin:
- How much Social Security can I hope to receive?
- How is my social security taxed after I reach full retirement age?
- Can a divorced spouse collect from an ex-spouse’s benefits?
- My children are receiving Social Security benefits. How is that benefit taxed?
- I am considering not taking retirement until 70. What are the benefits, if any?
How Much Social Security Can I hope to Receive?
Most sole practitioners and small business owners spend considerable effort each year to reduce their taxable incomes. They gather receipts to document every possible allowable expense.
S – Corporations reduce taxable income to the individual. A business that forms an S-Corporation can allocate a portion of the business revenue after expenses to wages, and the rest as a distribution to shareholders.
That means only the salary portion will be liable for self-employment tax (employer and employee portion = 15.3%) and the distribution portion will be taxed as regular, rather than employee earned income.
At $100,000, if you allocated $50,000 to salary and $50,000 to distribution to the shareholder (which includes you), that represents a considerable tax break on employment taxes. What would your monthly benefit be if you reported all 100K as payroll?
The income tax remains the same, 100K is still the income but the self-employment on the “2nd” $50k would be $6,500. If you hope to draw more social security benefits at retirement it is an option to explore.
If, like many Americans, Social Security is one of your only retirement benefits – now is the time to take a closer look at that strategy.
Social Security benefits are calculated on up to 35 years of employment. The formula is based on “average indexed monthly earnings.” They then take the years with your highest indexed earnings. See where this is going?
If you hope to draw more in Social Security benefits at retirement, you will need to show higher earnings. You can do that as easily as not taking all those allowable expenses you’ve gathered through receipts all year. A radical thought to be sure.
But how much more earnings do you need to show, for how long and what is the breakeven point? Your tax planning professional can help with that.
Your age now, your earning range, your target retirement age goal and your projected life expectancy all come into play.
Social Security provides an array of calculators if you want to tackle your figures.
How is My Social Security Taxed after I Reach Full Retirement Age?
The chart below details the tax thresholds.
Can a Divorced Spouse Collect from an Ex-Spouse’s Benefits?
The simple answer is – yes. The process to qualify is a bit more complicated, with the requirements provided in great detail on the Social Security site related to divorced spouses.
To qualify at all, you must have been married for 10 years or more. The SS department will ask for documentation. Of interest to some – Your ex-spouse is not affected by your claiming this benefit and he or she is not informed. How much you may be eligible to receive is based on the difference between your own benefits and your spouse’s benefit amount.
My Children are Receiving Social Security Benefits. How is that Benefit Taxed?
If the child has no other income they will not owe taxes on SS benefits.
- Does each child file his/her own tax return?
Yes, the child reports the SS on his/her own tax return. If the child earns wages while collecting SS benefits from a parent or grandparent, the same earning ceilings apply as those in the chart above. The SS site offers an earnings calculator to determine whether anyone will owe taxes due to earnings.
- Can a parent still take the child as a dependent?
The parent can take the child as a dependent if providing more than 50% support. Support is considered a residence, food, medical insurance and expenses, and clothing. It does not include education.
I am Considering not Taking Retirement Until 70. What are the Benefits, if any?
There are a number of considerations. Are you still receiving income from employment as an employee or as a self-employed individual? Based on the tax thresholds chart (above) you could end up paying income tax on the earnings you receive.
And then there is the question of how long you will collect. The benefit significantly increases if you wait, but that will only benefit you in total payouts received if you live long enough to make up for the years that you forgo collecting.
You can also go to the Social Security site that provides a number of options for you to check on your own earning history. My Social Security is the government run site where you sign up for a free on-line account. If you follow the link, the first page contains how-to-videos and information on how to get started.
If these questions, or others still leave you wondering about the tax implications of your choices, contact our Corte Madera office today to get more information about your tax planning options.