My partner and I have given many private and public seminars educating people about Social Security and emphasizing the need to “Make a Plan”. We are always amazed at the high level of confusion surrounding Social Security, along with the lack of qualified consultants. In this article I hope to demystify some of the most prevalent inaccuracies I see posted across the internet.
Did you know more than 90% of all Social Security recipients leave benefits on the table?
Social Security can be a joint lifetime benefit as typically a surviving spouse may step in to the shoes of a deceased spouse. It is extremely important for individuals to meet with a qualified Social Security expert to understand their benefits and to maximize the benefits paid out over joint lifetimes. Married couples have about 10-12 options and may be leaving as much as $10,000 per year on the table. The key is, especially for married couples, to educate yourself on all the different options.
Did you know the Social Security Administration uses your highest 35 years of indexed earnings to compute your monthly benefit?
There seems to be a lot of confusion on how benefits are computed. A lot of folks think it is the highest 3 years, highest 5 years or even the highest 10 years. If you don’t have 35 years of earnings under the Social Security system, they will still use 35 years to compute your benefit.
- First, based on the year you turn age 62, an indexing factor is applied to each year you have earnings to bring past years wages up to what they would be worth today. Only earnings through age 59 will receive this indexing. This doesn’t mean earnings after age 59 won’t be used in your benefit computation; it means they will be taken at the actual rate of those earnings.
- Secondly, the highest 35 years are added together and divided by 420 to get your average monthly indexed wage. The number 420 represents months of employment, or 35 years multiplied by 12 months.
- In the third step, Social Security breaks your average wage into 3 possible brackets. They call these bend points. The fourth step is to add these three brackets, or bend point amounts, together to get your full retirement age benefit. If you continue to work the Social Security Administration will review your computation each year which may result in an increase in your monthly benefit.
Did you know that some Social Security recipients have to pay federal income taxes on their Social Security benefits?
This usually happens if they have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that individuals report on their tax returns) in addition to their benefits. No one pays federal income tax on more than 85% of his or her Social Security benefits based on IRS rules.
The base income amounts for taxing benefits are $32,000 for a couple filing a joint return; zero for a married person filing a separate return who has not lived apart from his spouse during the entire year; and $25,000 in all other cases. Normally, 50% of your benefits may be taxable; however, up to 85% of your benefits can be taxable if either of the following situations applies to you:
- The total of one-half of your benefits and all your other income is more than $34,000 ($44,000 if you are married filing jointly).
- You are married filing separately and lived with your spouse at any time during 2012.
The IRS is responsible for assessing and collecting taxes. Social Security Administration employees will not answer questions about taxation. See IRS Publication 915 for further information.
These “Did You Know” facts address some of the more common misconceptions you’ll find printed online. In many ways, the rules of Social Security are like our tax code. If you understand all of the available opportunities then you can minimize what you owe. In the case of Social Security, the more you know can lead to a substantial increase in life time benefits.
Marc Kiner is a CPA and Social Security Consultant at Premier Living, where he helps retirees maximize their retirement benefits and income. Find more helpful tips from the Premier Living team at http://premiersocialsecurityconsulting.com/category/ss-information
