Important Ages 62 you can first apply for benefits. Overview 2/26/2016

Transcription

1 Social Security by the Numbers 64.2 million people in million new applicants For 64% Social Security was over half of their income 90% of income for 22% of married couples and 47% of unmarried persons Overview How to calculate benefits Factors to consider when to start Dependent and survivor benefits Social Security Disability benefits Taxation Medicare Page Important Ages 62 you can first apply for benefits Assume a $1,200 benefit at age benefits increase annually for a total increase of 25% - and no earnings restriction Benefit increases to $1, benefits increases 32% to max. Benefit increases to $2,000 Page 1 1

2 Social Security for 2016 Pages 1 & 2 Calculating Benefits Page 3 No COLA increase for 2016 Key figures on pages 1 & 2 Maximum taxable earnings Amounts for quarter of coverage Retirement earnings tax exempt amounts SSDI thresholds Maximum benefit amounts Calculation is a mystery Benefit is Graduated percentage of Average of your income in 35 highest-earning years After adjusting for inflation First you have to qualify for benefits Earning Credits Page 3 Average Wage Index Pages 3 & 4 Must have 40 credits Can collect spousal benefits without credits For 2016 $1,260 = 1 credit Cannot earn more than 4 credits in one year 10 year minimum Income in year earned Avg. wage in year turns 60 Average wage in year earned Calculation to index earlier income to current amounts. SSA provides indexing for

3 Average Indexed Monthly Earnings Page 4 Take 35 highest annual amounts If they don t have 35, then use $0 Add those amounts together Divide the total by 420 (35 x 12 months) See example on page 4 Pages 4-6 Primary Insurance Amount (PIA) Use brackets to calculate amount received at full retirement age For % of the first $856; 32% of the amount from $857 to $5,157; and 15% of amount over $5,157. What Does It All Mean? Knowing how benefits are calculated helps you understand retirement alternatives, and how SS benefits may increase (or not) There are also calculators to help estimate benefits. See link on page 6. Page 5 When to Start Drawing Benefits An individual can choose: Full retirement = full benefits Retire early = reduced benefits Retire late = increased benefits Compare benefits at younger age v. older age and find crossover point Then consider other issues relevant to the client Pages 6 3

4 Full Retirement Age v. Early Retirement Pages 6 & 7 See chart on page 6 for full retirement ages Early retirement Can begin collecting at 62 Benefits are reduced a fraction each month. See chart on page 7 Things to Consider Life expectancy and health Cash needs Other retirement assets Spouse s survivor needs Continuing to work Examples Pages 8 & 9 Late Retirement Working past full retirement has two benefits: Extra income = higher average lifetime earnings Credits add percentage to Social Security benefits Page 10 Break-Even Ages How long do I have to live to break even if I delay benefits? Even if retiree doesn t need benefits now, may be better off investing them For a true calculation you must consider interest on investments, and the potential tax on the income Crossover ages Pages 10 & 11 4

5 Page 11 Working & Drawing Benefits If under full retirement age $1 deducted for every $2 above limit 2016 ($1,310/month or $15,720/year) Year of full retirement age $1 deducted for every $3 above limit 2016 ($3,490/month or $41,880/year ) Only count months before retirement age What is Earned Income? Gross wages before deductions Net earnings from self employment Payment for services in a sheltered workshop; and Certain royalties and honoraria Page 12 Self-Employed Recipients Page 12 Can t just pay themselves a small salary to stay below limits S Corp shareholders can have double trouble: Avoiding SE tax, and collecting Social Security benefits See example on page 12 Pages 13 & 14 First Year of Retirement Only apply income limits for months after retirement. Beginning in the following year the earnings limit applies on an annual basis. 5

6 Special Payments Do Not Count Received after retirement, for work performed before retiring Bonuses & commissions; Accumulated vacation or sick pay; Back pay or severance pay; Deferred compensation Page 14 Benefits Readjusted Benefits are recomputed annually Income earned after they begin collecting may increase future benefits Page 14 Benefit Reductions Two possible benefit reductions: WEP Applies to workers who had earnings not subject to Social Security Withholding GPO Applies to individuals receiving government pensions who are eligible for spousal benefits See chart on page 15 Pages 14 & 15 WEP May apply to an individual who: 62 or became disabled after 1985; and Is eligible for pension based on income with no Social Security tax withholding Reduces lowest-tier PIA 90% threshold: 40% (up to 20 yrs. substantial earnings) 5% increments up to 30 yrs. substantial earnings Pages

7 GPO Page 18 Government pension will reduce spousal benefits by 2/3 of the government pension Even if retiree takes the government pension in a lump sum, they will calculate what that equals in monthly benefits. SSA Will Request Marriage Information SSA will request information on all prior marriages Page 18 They will compute maximum benefit to be paid to the individual Let s see how it works Page 18 Effect of Marital Status Many misconceptions Can remarry after 60, and still collect deceased spouse s benefits Can collect on divorced spouse s earnings if they were married for 10 years Widower may begin drawing at 60 Benefits may increase when former spouse dies Currently Married Pages 18 & 19 Once individual reaches 62 they can collect their own benefits, or 50% of their spouse s if the spouse has begun collecting Must be married for 12 months Working beyond full retirement only helps worker and/or widower 7

8 Widow(er) May draw on deceased spouse at: Age 60 reduced benefits Pages 19 & 20 Full retirement age 100% of deceased spouse s benefits Special rule if deceased spouse hadn t reached FRA Must have been married 9 months Divorced Spouses Page 20 May draw on former living spouse if: Former spouse is at least 62; Marriage lasted 10 years; Claimant is at least 62; and Divorced spouse is currently unmarried or remarried after 60. Must wait 24 months from divorce to collect on former spouse s account Multiple Spouses Drawing Page 21 SSA will compute based on 3 or more accounts Divorced spouse collecting will not reduce benefits of current spouse If former spouse remarries he/she loses benefits, but becomes reeligible if they divorce Benefit Recomputation SSA keeps information on all prior marriages If a spouse or former spouse dies SSA will automatically recompute benefits Page 22 8

9 Remarriage After 60 If widow(er) or divorced spouse remarries after 60, benefits aren t changed Especially important for widow(er) 100% of former spouse s benefits is usually more than 50% of current spouse s benefits Page 22 Claim & Suspend Benefit Dead on April 30, 2016 Old rules One spouse applies then suspends Allowed other spouse to file restricted application for spousal benefits only Claiming spouse had two options: Wait to start collecting maximizing benefit at age 70; or lift suspension prior to age 70 & get retroactive benefits Page 23 New Rules Pages 23 & 24 No change for those using old strategy prior to 4/30/16 If age 62 by 12/31/15 you have until 4/30/16 to implement claim & suspend Can still retroactively apply & get 6 up to months of benefits Foreign Spouses Pages 24 & 25 Can collect spouse s Social Security eventually. Must become US citizens, or Live in US for 5 years while married to individual who paid in to Social Security Once eligible for SS benefits, they are also eligible for Medicare 9

10 Same-Sex Spouses Page 25 Other Considerations Page 26 After the Supreme Court struck down portions of DOMA, SSA began advising same-sex spouses to apply for spousal benefits SSA currently processing and paying same-sex couples benefits Some strategies only work at FRA Weigh differences in age and benefit amounts when planning Longevity is an important consideration Results are generally best when collecting on lower earner 1 st, with other spouse waiting until 70. Children Under 19 Parents who are collecting Page 27 with kids under 19 50% of parent s benefits Child must be unmarried 18 years old only if in school/disabled There is a maximum family benefit ( %) Earnings limits apply to children too Representative Payees Page 28 Representative will receive benefits because child is a minor Payments may only be used to meet needs of the child Benefits are taxable to child 10

11 Keep Records! Page 28 & 29 Representative must report how benefits were spent & saved. Online report available at: m/index.htm SSA will ask for money back if benefits not used properly. Repaying Benefits Pages 29 & 30 New rules on application withdrawals Benefits must be repaid (installments available) Must withdraw within 12 months Only allowed 1 withdrawal Use Form SSA-521 Military Benefits Military benefits don t usually reduce Social Security benefits Individuals who served from didn t pay in to Social Security May be credited see SSA publication May have special extra earnings Medicare eligibility may change/end VA insurance benefits Pages 30 & 31 Survivors Benefits Available to widow(er), children, parents, and divorced spouses Different benefit percentages depending on type of survivor There is a limit on total benefits Ranges between 150% and 180% of the worker s benefit amount One-time death payment of $255 Pages 31 & 32 11

12 Social Security Disability Disability must last 1 year or until death Physician doesn t declare individual disabled, DDS does. See questions on page 33 1 st payment after 6 th month of disability Get full benefit without early retirement reduction Pages There are earnings limits See chart on page 34 Get 9 month period to test ability to return to work Medical condition SSA uses concept of substantial gainful activity Can apply for retirement and disability benefits at the same time Pages Page 35 Substantial Gainful Activity Particularly applies to Schedule C or partnership Allows recipient to receive profit if not working Substantial gainful activity: Not blind $1,130/month Blind $1,820/month Appeals & Reviews Page 36 If SSA denies disability claim the individual may appeal SSA will pay benefits retroactively if the individual is ultimately approved SSA will also review grated claims periodically 12

13 Possible Offset Applies when disabled individual received workers comp. benefits, or state disability benefits Also applies to certain public disability benefits from federal, state, or local governments Doesn t apply to benefits on page 37 Computation on Page 38 Pages 37& 38 Household Employees Only earn credits on earnings of at least $2,000 from each employer Pages 38 & 39 No More Checks Page 40 Review Statements Page 40 Have bank account information when applying for benefits Benefits will be direct deposited Can also request prepaid debit card, or Direct Express card Current recipients--annual statement Others--Statements sent every 5 years Can always review account online Review statements to spot potential problems Identity theft, or Incorrect earnings reported 13

14 Taxation of Benefits Pages 41 & 42 Retroactive Benefits Page 42 Up to 85% may be taxed Taxable if provisional income (50% of benefits + Modified AGI ) is more than the base amount/adjusted base amount Modified AGI listed on pp. 39 and 40 Benefits are taxed to beneficiary Even if child s check in parent s name Happens in two cases Applying retroactively after FRA When an appeal is granted retroactively Can report all in year of receipt, or do offline manual calculation Consider income levels in prior years U.S. Citizens Living Abroad/Nonresident Aliens Can you receive them while living abroad?: Depends Exempt from tax under treaties Nonresident alien withholding: 85% benefits taxed at 30% rate Pages 43 & 44 Repayments Pages 44 & 45 When an individual repays benefits: First reduce current-year benefits For excess: $3,000 or less = misc. itemized deduction Greater than $3,000 involves more complex calculation See example on page 45 14

15 Medicare Surcharge Pages 45 & 46 Surcharge is based on modified AGI using a two-year lookback Also pay a surcharge on Part D May appeal the surcharge if individual had a life-changing event Tax Planning for Social Security Benefits This is an area where you can help your clients save tax Page 46 Convert traditional IRAs to Roth IRAs Bunch distributions into alternate years Use distributions to invest in real estate Optional Method Pages Report a portion of gross income rather than net income Increases Social Security benefits May also increase tax refunds Must meet requirements listed on page 45 Pages Medicare Insurance Options Review the decisions chart on page 49 to help make important Medicare decisions And comparison of Parts A, B, C, & D on page 50 15

16 Shared Eligibility Page 51 Paying Premiums Page 52 Must be eligible for Social Security to be eligible for Medicare Government employees are eligible if they paid Medicare portion Don t have to have required number of quarters, but premium will be higher Premiums are generally deducted from Social Security benefits If not receiving benefits, or if benefits are enough to pay premium: Medicare Easy Pay Check or money order Credit Card Information & Assistance Page 52 See page 52 for a list of additional resources for you and your clients Thank you for attending! Go to to register for the following upcoming webinars: Spidell's Quarterly Tax Update Various Dates, including April 26 Regulatory Review: Practicing Within the Law Various Dates, including April 27 Fundamentals of Fraud Prevention & Detection Thursday, May Practical Accounting Update Wednesday, June 8, and Thursday, June 9 16