By Jennifer Waters
You may be raising a glass to 40 years of marriage when you
officially retire, but the Internal Revenue Service won't be
celebrating with you.
Instead, federal tax laws favor retired folks who are single if
they have income outside of Social Security benefits--a statute
that prompts some couples to divorce at retirement.
You will be taxed on as much as 85% of your Social Security
benefits if your combined income exceeds certain limits. In Social
Security's arithmetic, "combined income" is the sum of your
adjusted gross income and nontaxable interest plus one-half of your
annual benefit.
The combined-income ceiling on two singles is higher than for
married couples filing jointly. For married couples on tight, fixed
incomes, the tax hit when filing jointly could be consequential.
And don't think you can be married and file separately to avoid the
marriage tax. In that case, the agency warns, "you probably will
pay taxes on your benefits."
Individuals may face taxes on up to 50% of their benefit if the
combined income is between $25,000 and $34,000, and up to 85% if
that threshold is above $34,000. Identical percentages apply to
combined income limits for joint returns at $32,000 to $44,000, and
above $44,000.
As a result, an unmarried couple living together and filing
separately can have a higher combined income level of $50,000 to
$68,000 before getting whacked with higher taxes.
Q: If you continue work after 70 and earn greater than $50,000,
how does Social Security work? I have heard that the amount of the
Social Security check is deferred and then added to the payment you
receive when you stop working.
Susan D., Dallas
A:For starters, once you reach your full retirement age (FRA),
which is 66 for those born from 1943 to 1954, you will get your
full benefit no matter how much you earn. So if your income exceeds
$50,000 at age 70, your benefit is all yours.
What you're referring to is the earnings test that applies to
those younger than FRA who are collecting benefits and still
working. In those cases, SSA deducts $1 from benefits for every $2
earned above a threshold that for 2014 is $15,480.
If this is the year you reach your FRA, SSA pushes the income
limit to $41,400 and deducts $1 for every $3 earned in the months
before your birthday. (There is a special rule that applies the
year you retire if your earnings top the limit but you are retired
for part of the year.)
As for the deferment, this is one of those rare cases when you
can raise your monthly benefit, which was reduced from FRA
disbursements because it was taken early. Once you reach retirement
age, your monthly benefit climbs, taking into account those months
in which your benefits were reduced because of the earnings
test.
Q: My wife will be 65 in December and I am 62. My wife filed for
Social Security retirement benefits after her 62nd birthday. I want
to wait until 70 to take a benefit. However, if I lose my job and
cannot find another, will I be eligible to file for a spousal
benefit? What would that be?
Bill Heptig, Prior Lake, Minn.
A:The short answer is yes, you can file for a spousal benefit
even now. But remember this: If you file for a spousal benefit
before you reach your full retirement age of 66, Social Security
considers you an early filer and computes your own retirement
benefit as well as your spouse's.
If your own retirement benefit is higher than your spousal
benefit, Social Security will pay your retirement benefit--and it
will be at a permanently reduced rate. (The spousal benefit amount
is based on your age when you file.)
IIf you wait until after your FRA to file, you can file a
restricted application for your Social Security benefits, which
will insure that your own benefits are growing while you collect
spousal benefits. You will receive 50% of her full benefit and can
switch to your own, higher benefit at 70.
If you can work until you're 70, you may file and suspend your
own benefits at your FRA. Should you change your mind about waiting
until 70, you can collect a lump-sum back payment to age 66 by
"unsuspending."
Q: At age 62 (May 2007), I started collecting my Social Security
retirement benefit. I am getting about $1,700 a month. At age 62
(January 2009), my wife started collecting her Social Security. She
is getting about $400 a month. Is there any way we can increase our
benefits? I have read that a person can collect based upon their
spouse's earnings.
Joseph D., Pearl River, NY
A:Yes, your wife should be collecting as much as 50% of your
benefit based on her age when she files. Because she filed at 62,
48 months before her full retirement age (if she filed during her
birth month), she likely received only 30% of half of your original
full benefit. Remember that your benefits rise with annual
cost-of-living hikes.)
Use the calculator for "retirement planner: benefits by year of
birth" at ssa.gov to refigure what she should be getting based on
your original full benefit. If it's higher than her $400, go to
your local Social Security office and ask to have her benefits
recalculated.