Changing from Survivor Benefits to Own Benefits at age 70

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PapaGeek
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Changing from Survivor Benefits to Own Benefits at age 70

Post by PapaGeek » Tue Sep 12, 2017 4:11 pm

For the sake of simplicity, let’s say that my Survivor benefits are $2,000 a month and my own benefits at age 70 will be $3,000 a month, and assume that I will turn 70 in May 2018. Also to make it easy, there will be no COLA adjustments. Ok the stage is set.

SSA told me that I can’t just start my own benefits in the middle of the year, I have to wait until January and I will then be given retro payment adjustments back to my 70th birthday.

I was hopeful that my SSA-1099 for 2017 would be $24,000, 2018 would be $31,000 (5 months at $2,000 and 7 months at $3,000), and 2019 etc. would be $36,000. BUT, that is not the way I understand what they said.

2017 will be $24,000, but 2018 will also be $24,000 because the actual change does not happen until January 2019. Then 2019 will be $43,000 (the normal $36,000 plus 7 months of catchup at $1,000 each month). Finally 2020 etc. will be $36,000.

I don’t mind the delay in getting the extra $7,000, but the added SSA-1099 income for 2019 could cause some unwanted tax problems. Is there any way around this?

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Re: Changing from Survivor Benefits to Own Benefits at age 70

Post by pshonore » Tue Sep 12, 2017 4:58 pm

I've not heard of that (not being able to start one's benefit in the middle of the year). I do know that if you're not 70 when you file for your own benefit, you will only get DRCs though December of the previous year and the rest are paid sometime later.

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Re: Changing from Survivor Benefits to Own Benefits at age 70

Post by #Cruncher » Tue Sep 12, 2017 8:50 pm

PapaGeek wrote:
Tue Sep 12, 2017 4:11 pm
... 2018 would be $31,000 ... and 2019 ... would be $36,000. BUT, that is not the way I understand what they said. ... 2018 will also be $24,000 ... Then 2019 will be $43,000 ... the added SSA-1099 income for 2019 could cause some unwanted tax problems.
What tax problems, PapaGeek? Have you calculated the tax both ways? As you know [*], federal income tax computation gets complicated when Social Security benefits are involved. My calculations show that if you only have ordinary income besides SS (i.e., no tax exempt interest or qualified dividends), for a single filer taking the standard deduction using 2017 tax brackets the total two years tax varies from about $298 more to $744 less depending on the amount of other income.

Here is a table comparing the federal tax for the two scenarios with varying amounts of other income each year:
  • Case A: $31,000 SS benefit in 2018 and $36,000 in 2019
  • Case B: $24,000 SS benefit in 2018 and $43,000 in 2019

Code: Select all

Ordinary   ---- Two Year Tax ----
  Income   Case A   Case B   Diff

Code: Select all

   9,000        0        0      0 
   9,500        0       55     55 
  10,000        0      130    130 
  10,500       30      205    175 
  11,000      105      280    175 <--
  11,500      235      355    120 
  12,000      385      435     50 
  12,500      535      560     25 
  13,000      685      703     18 
  13,500      835      870     35 
  14,000      985    1,038     53 
  14,500    1,135    1,205     70 
  15,000    1,285    1,390    105 
  15,500    1,435    1,604    169 
  16,000    1,585    1,818    233 
  16,500    1,760    2,031    271 
  17,000    1,974    2,245    271 <--
  17,500    2,199    2,459    260 
  18,000    2,450    2,673    223 
  18,500    2,701    2,886    185 
  19,000    2,979    3,136    158 
  19,500    3,256    3,388    131 
  20,000    3,534    3,639    105 
  20,500    3,811    3,890     79 
  21,000    4,089    4,141     53 
  21,500    4,366    4,393     26 
  22,000    4,644    4,644      0   
  ...
  30,000    9,084    9,084      0 
  30,500    9,361    9,401     40 
  31,000    9,639    9,771    133 
  31,500    9,916   10,141    225 
  32,000   10,214   10,511    298 <--
  32,500   10,584   10,881    298 
  33,000   10,954   11,251    298 
  33,500   11,409   11,621    213 
  34,000   11,871   11,991    120 
  34,500   12,334   12,361     28 
  35,000   12,796   12,796      0 
  ...
  40,500   17,884   17,884      0 
  41,000   18,346   18,284    (63)
  41,500   18,809   18,640   (169)
  42,000   19,271   18,996   (275)
  42,500   19,734   19,353   (381)
  43,000   20,196   19,709   (488)
  43,500   20,659   20,065   (594)
  44,000   21,121   20,421   (700)
  44,500   21,521   20,778   (744)
  45,000   21,878   21,134   (744) <--
  45,500   22,234   21,490   (744)
  46,000   22,590   21,846   (744)
  46,500   22,946   22,203   (744)
  47,000   23,240   22,559   (681)
  47,500   23,490   22,915   (575)
  48,000   23,740   23,271   (469)
  48,500   23,990   23,628   (363)
  49,000   24,240   23,984   (256)
  49,500   24,490   24,340   (150)
  50,000   24,740   24,696    (44)
  50,500   24,990   24,990      0 
	  ...
There is no tax effect unless annual other income exceeds $9,000 per year. The additional two year tax for Case B versus Case A then rises to about $175 at $11,000; falls off; then rises to about $271 at $17,000; falls off; then rises to about $298 at $32,000; and then falls off again. Finally beginning at about $41,000 of other income the two year tax for Case B starts being less than the two year tax for Case A; at $45,000 it is $744 less. Finally after $50,500 of other annual income, there is again no difference in tax between the two cases.

* PapaGeek is the author of the Wiki's Social Security tax impact calculator.

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Re: Changing from Survivor Benefits to Own Benefits at age 70

Post by PapaGeek » Wed Sep 13, 2017 6:37 am

Thanks for adding the link to my own tax calculator!

Our issue has to do with the actual numbers we are working with.

We are working hard to insure that our income levels will remain just below the 46.25% marginal rate.

A portion of our income at age 70 will be from Qualified Dividends which are tax free if you stay below the 25% Federal Bracket.

Without the Dividends the tax increase would be smaller, but we are getting double taxed on the dividends.

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Re: Changing from Survivor Benefits to Own Benefits at age 70

Post by #Cruncher » Wed Sep 13, 2017 9:47 am

PapaGeek wrote:
Wed Sep 13, 2017 6:37 am
Our issue has to do with the actual numbers we are working with.
I'll repeat the question from my first post: "Have you calculated the tax both ways?"
PapaGeek in same post wrote:We are working hard to insure that our income levels will remain just below the 46.25% marginal rate. ... A portion of our income at age 70 will be from Qualified Dividends ...
I'm trying to help you by computing the tax difference of the two scenarios. It would be helpful to know whether you're filing single or joint, and what are your qualified dividends and ordinary income.

To illustrate what I'm trying to do, assuming
  • $24,000 of SS benefits
  • Filing single with age 65+ standard deduction and 2017 tax brackets
  • No tax exempt interest, qualified dividends, or long term capital gains
The 46.25% marginal tax rate starts when non-SS ordinary income equals $34,649. [*] If your non-SS ordinary income were just below this at $34,500 the following table shows that the two year tax is about the same for both scenarios -- only a $28 difference. If this were your case, then there would be little need to worry about the Case B scenario.

Code: Select all

Social Security 50% threshhold    25,000   ----------------------->
Social Security 85% threshhold    34,000   ----------------------->
Ord Income Tax Bracket 15%         9,325   ----------------------->
Ord Income Tax Bracket 25%        37,950   ----------------------->
                                  --- Case A ----   --- Case B ----
Non-SS Ordinary Income            34,500   34,500   34,500   34,500
Social Security Benefit           31,000   36,000   24,000   43,000
SS Relevant Income                50,000   52,500   46,500   56,000
50% SS taxable                     4,500    4,500    4,500    4,500
85% SS taxable                    13,600   15,725   10,625   18,700
Total SS taxable                  18,100   20,225   15,125   23,200
Adjusted gross income             52,600   54,725   49,625   57,700

Code: Select all

Deductions plus Exemptions        11,950   11,950   11,950   11,950
Taxable Income                    40,650   42,775   37,675   45,750
Ordinary taxable @ 25%             2,700    4,825      -      7,800
Ordinary taxable @ 15%            28,625   28,625   28,350   28,625
Ordinary taxable @ 10%             9,325    9,325    9,325    9,325
Ordinary tax @ 25%                   675    1,206      -      1,950
Ordinary tax @ 15%                 4,294    4,294    4,253    4,294
Ordinary tax @ 10%                   933      933      933      933
Total tax                          5,901    6,433    5,185    7,176
Two years tax                          12,334            12,361
Increased tax Case B vs A                                    28
These figures are from the Compare sheet of my Marginal Tax Rates spreadsheet and confirmed with the TaxAct Calculator.

* With $34,649 of non-SS ordinary income, the SS "Relevant" income is $46,649 (34649 + 24000 / 2). This makes $15,251 of SS taxable [50% * (34000 - 25000) + 85% * (46649 - 34000)]. This makes taxable income equal $37,950 (34649 + 15251 - 11950) which is the start of the 25% tax bracket. Since each $100 increase of ordinary income causes $85 of SS to become taxable, the marginal rate is 46.25% (25% * 1.85). (See the Wiki's Taxation of Social Security benefits for more information.)

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