Question about allocating extra income Re: Social Security

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StealthWealth
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Question about allocating extra income Re: Social Security

Post by StealthWealth »

Situation: A married couple with wife earning $117k in 2014 (maximum for Social Security contributions) and husband earning $50k. All available retirement accounts are maxed out each year. There is an opportunity to earn an extra $20k which could be paid as W2 wages to either individual.

Question: Is there pros/cons to who earns the extra income?

It seems that the couple get to keep more if the income is attributed to the wife as the income as it is not subject to the 6.2% tax. Assuming the couple remains together for life, the lowest earner would probably claim spousal social security anyway making their contributions not important. Is this true? Is there a case for attributing the income to the lower earner?
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CaliJim
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Re: Question about allocating extra income Re: Social Securi

Post by CaliJim »

Hi,

Not enough information given really. To get the 'correct' answer you'd need to fully model it using the social security PIA calcs, SS claiming age, current health and life expectancy tables, etc.

My question is, is there work to be done to earn this money, and which spouse is the person who can most easily, competently, legally, and quickly do the work?

Or.... the husband should just 'man up' and 'get 'er done'. :D
Last edited by CaliJim on Mon Nov 10, 2014 4:12 pm, edited 1 time in total.
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ObliviousInvestor
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Re: Question about allocating extra income Re: Social Securi

Post by ObliviousInvestor »

StealthWealth wrote:It seems that the couple get to keep more if the income is attributed to the wife as the income as it is not subject to the 6.2% tax.?
Yes, less tax will be paid if it is the wife who earns the income.

StealthWealth wrote:Assuming the couple remains together for life, the lowest earner would probably claim spousal social security anyway making their contributions not important. Is this true?
No way to know without knowing more about their earnings histories. A person's Social Security retirement benefit is based on their 35 highest years of (wage-inflation-adjusted) earnings. It's not a straight-line relationship though. That is, if Person A has twice the earnings of Person B, Person A's retirement benefit will generally be less than twice Person B's retirement benefit.

http://www.ssa.gov/oact/cola/piaformula.html
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StealthWealth
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Re: Question about allocating extra income Re: Social Securi

Post by StealthWealth »

Thanks CaliJim and ObliviousInvestor. I knew it had a lot of moving parts!

This is a young couple with only a few years of earning history. If we assume that one individual will always earn the maximum taxable earnings moving forward and one will earn exactly half of the maximum, could we make a reasonable guess as to which would come out ahead? My gut is to lean towards attributing it to the higher earner to avoid the 6.2% as it seems it would have minimal impact on the lower earners ultimate SS. CaliJim and ObliviousInvestor - What is your gut reaction knowing that the difference is probably pretty small in the long run anyway?

This additional income is probably a one time or limited time opportunity to do some administrative work for a company in the evenings. Either individual could easily do it in an hour or so each night and it is really a pretty sweet deal admittedly!

-Stealth
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ObliviousInvestor
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Re: Question about allocating extra income Re: Social Securi

Post by ObliviousInvestor »

StealthWealth wrote:If we assume that one individual will always earn the maximum taxable earnings moving forward and one will earn exactly half of the maximum, could we make a reasonable guess as to which would come out ahead? My gut is to lean towards attributing it to the higher earner to avoid the 6.2% as it seems it would have minimal impact on the lower earners ultimate SS.
A person who is assumed to earn have of the maximum taxable earnings for all 35 years would be beyond the second "bend point." That is, increases in their "average indexed monthly earnings" would only be replaced at a 15% rate in their primary insurance amount. In other words, you're right that further increases in earnings would only have a modest impact on their ultimate Social Security benefit.

I would not personally be inclined toward paying the additional tax solely for the increase in expected retirement benefits. But, whether it ends up being worth it or not will depend on how long each spouse ends up living, whether their earnings really do follow the anticipated path, whether there are changes in Social Security laws, and more. Definitely no way to know in advance.
Mike Piper | Roth is a name, not an acronym. If you type ROTH, you're just yelling about retirement accounts.
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Re: Question about allocating extra income Re: Social Securi

Post by Spirit Rider »

One issue to be aware of. If this additional $20k is from a different employer, it will still be subject to FICA withholding. It can only be refunded at tax time or by adjusting withholding on any combination of the joint filing income.
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