It has been widely reported that the first person to receive Social Security benefits was Ida May Fuller. She worked for three years under the SS program and paid $24.75 in payroll taxes.
Ida lived to be 100 and collected $22,888 in SS benefits. Ida lived much longer than most people at that time and received a huge return on her investment. While most people don’t get this ROI, most who live a normal lifetime do very well.
Today, we are going to look at some nuances about Social Security, an important retirement asset for many people. But it does receive a little different tax treatment.
When you contribute to an IRA or 401(k), you get a tax deduction. When you pay SS taxes, you do not. Yet SS payments may be taxable when you receive them. If you file taxes as an individual, if your provisional income is below $25,000, you pay zero federal taxes on your benefit. If your income is $25,000 to $34,000, the taxable amount is 50%. If it’s above $34,000, 85% is taxable.
Couples get little higher totals, but it is not double the individual tax rate. Provisional income is half of your SS income and all of the rest added together. A major mistake that people make when deciding when to start SS income is not considering the effect this income has on their other taxable assets. With proper planning, you may be able to pay taxes on qualified money or capital gains at a lower tax rate.
Social Security considers your highest 35 earning years when calculating your benefit. Sometimes, people ask whether working part time after retirement will hurt their SS benefit. The answer is no, because you are ether replacing a lower earning year or it does not count.
Even if you are collecting SS, you have to continue to pay the tax on earned income. If this does not replace a lower earning year, this additional tax does not increase your benefit.
Sometimes, there is confusion about spousal benefits. If you have been married for at least nine months, you may be able to collect a spousal benefit. If you have reached full retirement age, you may be entitled to half of your spouse benefit at the spouse’s full retirement age. If you start receiving benefits before your FRA, you will get a reduced amount for life. This reduction includes the calculation for spousal benefits.
To collect a spousal benefit, your spouse must have filed for his/her own benefit. The only exception is someone who has been divorced for at least two years. People born in 1953 or before have a special opportunity. They may be able to file a restricted application. This means they can file for spousal benefits at full retirement age and have their own benefit continue to roll up at 8% a year until age 70.
Everyone born in 1954 or later must receive their own benefit first. Then if half of their spouse’s FRA is more than their own total, they will receive the amount necessary to bring the total to 50%. Delayed benefits for waiting from your FRA to age 70 are not considered when calculating spousal income. They do count for survivors benefit upon the death of one spouse.
Good Social Security planning can make your retirement more enjoyable. Make sure you collect information and consider all of your options.
Gary Boatman is a Monessen-based certified financial planner and the author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
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