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Social Security for Married Couples is a Numbers Crunching Game

Recent legislation has reduced Social Security claiming strategies for married couples. For example, if you failed to initiate a “file-and-suspend” plan before April 30, 2016, that opportunity is no longer available.

Still available

Another popular approach for married couples—filing restricted applications for spousal benefits—is still viable, but only for those who reached age 62 on or before January 1, 2016. The people who were grandfathered for this tactic have age 66 as their full retirement age (FRA). At FRA, someone in this age group can apply for Social Security retirement benefits, restricting the claim to a benefit that’s based on the other spouse’s work record.

Example 1: Nick and Paula Robinson are married. Nick worked for more years than Paula, earning higher pay, so Nick has the larger Social Security benefit.

Suppose Paula is now age 64. She can file a restricted application to get a spousal benefit at age 66, her FRA. Paula’s spousal benefit could equal 50% of Nick’s benefit. Paula could collect this spousal benefit while her own benefit, based on her work history, continues to grow at 8% a year under current law.

Paula can collect a spousal benefit until age 70, the latest possible starting date. Assuming that Paula’s own benefit at some point will exceed the spousal benefit she receives on Nick’s work record, Paula would eventually receive her own, larger benefit.

Example 2: Assume the same facts as in example 1. If Nick meets the age requirement, he can file a restricted application to start his spousal benefit at age 66, his FRA. At this time, he could collect a benefit based on Paula’s work record. Meanwhile, Nick’s own retirement benefit can keep growing at 8% a year until as late as age 70. (A restricted application by one spouse requires the other spouse to be receiving benefits.) If you meet the age requirement for a restricted benefit, our office can help you calculate the method that will likely have the greater payout.

No restrictions

Such restricted applications are available only to certain people who are 63 and older in 2017. Even so, there are other opportunities for all married couples to consider in their planning for Social Security.

Example 3: Steve and Vicki Baker are married, with both reaching age 61 this year. They can’t use the restricted application strategy, as explained previously. Suppose both Steve and Vicki have substantial work histories, so they’ll both receive sizable Social Security benefits, but Vicki’s benefit would be larger. One plan is for Steve to begin his own benefits at age 62, the earliest date possible, while Vicki waits until age 70.

Assuming Steve is retired (so he won’t have earnings that reduce his Social Security benefits), Steve’s benefits would provide eight years of cash flow while the couple is in their 60s. This would make it easier for the Bakers to wait until Vicki reaches age 70 to start benefits; her larger benefit would increase by approximately 8% a year while she waits to start.

Moreover, if Vicki is the first spouse to die, Steve would receive the amount Vicki was receiving, as a surviving spouse. If Steve dies first, Vicki would continue to receive her larger benefit.

Uneven benefits

Among married couples, there may be one spouse who will get a much larger Social Security retirement benefit, often because the other spouse focused on raising the children and managing the household. How might such couples proceed?

Example 4: Jim Lawson has contributed much more to Social Security than his wife, Marie. Therefore, Jim will be entitled to a $2,600 monthly benefit at his FRA, but Marie’s FRA benefit will be only $800 a month. One approach is for Jim to claim benefits at his FRA and begin receiving $2,600 a month. Marie, who is the same age as Jim, also could claim at her FRA. If so, Marie would receive a spousal benefit that’s 50% of Jim’s benefit—$1,300 a month, in this example—which would be larger than her own. Here, Marie will get a large increase in benefits if she’s the surviving spouse.

Another strategy might work for spouses of different ages:

Example 5: Suppose that Marie Lawson is a few years younger than her husband, Jim. If Jim can wait to start benefits until he’s age 70, he’ll get the maximum monthly benefit. Marie could start at age 62, the earliest possible date, claiming benefits on her own work record. Marie would receive a reduced benefit because she started so early, but she’d still obtain some cash flow.

Marie could wait until Jim is 70 and claims his maximum benefit then claim a spousal benefit, which might increase her Social Security checks. Again, increasing Jim’s Social Security benefit will also increase Marie’s survivor’s benefit, if Jim predeceases her.

Deciding when to start Social Security will depend on many factors, such as health and the need for income. HLB Gross Collins, P.C. can crunch the numbers for you to help you proceed.

May/June Dates to Remember

May/June 2017 Deadlines

MAY 2017

May 10

Employers. For Social Security, Medicare, and withheld income tax, file Form 941 for the first quarter of 2017. This due date applies only if you deposited the tax for the quarter in full and on time.

May 15

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in April if the monthly rule applies.

JUNE 2017

June 15:

Individuals. If you are not paying your 2017 income tax through withholding (or will not pay enough tax during the year that way), pay the second installment of your 2017 estimated tax.

If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due for 2016. If you want additional time to file your return, file Form 4868 to obtain four additional months to file, then file Form 1040 by October 16.

Corporations. Deposit the second installment of estimated tax for 2017.

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in May if the monthly rule applies.

HLB Vorarlberg joins HLB International as part of the HLB Austria Federation

HLB Vorarlberg GmbH Steuerberatung und Wirtschaftsprüfung (HLB Vorarlberg) joins HLB International as part of the HLB Austrian federation of independently owned CPA and business advisory firms.

The HLB Vorarlberg professional team, headquartered in Feldkirch (Vorarlberg), is one of the leading advisory firms in Vorarlberg and has been serving businesses and individuals since 1991. The firm provides accounting, audit, tax and consulting services, M&A and structuring. They serve clients in manufacturing, construction, high-tech and service enterprises. They have a large practice serving family-owned enterprises.

HLB Vorarlberg adds three partners and 30 staff to HLB Austria. They have an extensive client base with international businesses, particularly in Germany and Switzerland.

“The addition of HLB Vorarlberg strengthens the Austrian federation and broadens the geographic coverage in the west of Austria, which is an important economic area at the frontier of Germany, Switzerland and Liechtenstein. Collectively, the HLB Austria federation now has 9 offices served by 20 Partners and 157 staff” said Markus Grün, Partner of HLB Intercontrol GmbH, on behalf of the HLB Austria Federation.

For further information, visit www.hlb-vorarlberg.com or www.hlbintercontrol.at

Upcoming Deadlines and Dates To Remember

April/May 2017 Upcoming Deadlines

April 18

Individuals. File a 2016 income tax return. If you want an automatic six-month extension of time to file the return, file Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return. Then, file Form 1040, 1040A, or 1040EZ by October 16.

If you are not paying your 2016 income tax through withholding (or will not pay in enough tax during the year that way), pay the first installment of your 2017 estimated tax. Use Form 1040-ES.

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in March if the monthly rule applies.

Household employers. If you paid cash wages of $2,000 or more in 2016 to a household employee, file Schedule H (Form 1040) with your income tax return and report any household employment taxes. Report any federal unemployment (FUTA) tax on Schedule H if you paid total cash wages of $1,000 or more in any calendar quarter of 2015 or 2016 to household employees. Also, report any income tax you withheld for your household employees. 

Corporations. File a 2016 calendar year income tax return (Form 1120) and pay any tax due. If you want an automatic six-month extension of time to file the return, file Form 7004 and deposit what you estimate you owe.

Corporations. Deposit the first installment of estimated income tax for 2017.                                                                    

May 10    

Employers. For Social Security, Medicare, and withheld income tax, file Form 941 for the first quarter of 2017. This due date applies only if you deposited the tax for the quarter in full and on time.

May 15

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in April if the monthly rule applies.

ESOPs as a Retirement Plan

Among the retirement plans that small businesses can offer to their workers are employee stock ownership plans (ESOPs). As the title indicates, an ESOP is a process for transferring ownership of the company to employees. How does that work as a retirement plan?

In some ways, an ESOP is similar to a profit-sharing plan (see the CPA Client Bulletin, January 2017), in which the company makes cash contributions. With a “vanilla” or unleveraged ESOP, the company funds the plan by contributing shares of its stock, or cash to buy those shares.

Uniquely among retirement plans, ESOPs can be leveraged. In one scenario, the ESOP borrows money from a financial institution or from another party, then uses the borrowed funds to purchase shares of the employer’s stock. Once the shares are in the plan, they are allocated to accounts of participating employees, generally all full-time workers over age 21. Assuming the company’s shares are not publicly traded, annual independent appraisals track the value of the company’s shares, which in turn determine the value of each participant’s ESOP holdings.

Current law calls for gradual vesting of all employer contributions over six years, or complete vesting at three years. When employees leave the company, at retirement or sooner, they receive their vested shares. The employer is required to buy back the shares, at the currently appraised price. Therefore, a long-time ESOP participant could retire with a substantial amount from the plan.

Advantages to owners

Why should business owners consider an ESOP? Some studies indicate that employees become motivated to excel when they become employee-owners. They know that good corporate results will boost the annually appraised value of their shares, and ultimately provide a bigger payout. Strong results will benefit major shareholders as well.

What’s more, ESOPs offer some exceptional tax benefits to the sponsoring company and its principals.

Example 1: A local bank lends money to an ESOP, which uses those dollars to buy common stock from ABC Corp, the ESOP sponsor. Going forward, ABC makes tax-deductible contributions to the ESOP, which uses that money to repay the bank loan. With such an arrangement, ABC effectively borrows money through the ESOP, then deducts the principal and interest payments made on the ESOP loan, rather than just the interest payments.

In addition to such tax advantages, an ESOP provides a way for business owners to sell their shares at appraised value, if there are no other obvious buyers. In some situations, the owners may be able to defer taxes on a profitable sale of shares to an ESOP, perhaps indefinitely.

Example 2: Alice Baker sells 50% of her Alice Baker Co. stock to her company’s ESOP for $2 million. Her basis in those shares is $200,000, giving her a taxable gain of $1.8 million. Alice reinvests the sale proceeds in qualified replacement property, which includes stock in other U.S. corporations. Alice can defer tax on that $1.8 million gain until she sells her qualified replacement property.

If her company is an S corporation, however, Alice won’t qualify for the tax deferral on the gain from the sale of her stock to the ESOP. However, ESOPs may offer other tax benefits to S corporations, such as tax exemption for any profits attributable to ESOP ownership.

ESOPs can be expensive

Business owners sponsoring ESOPs may realize advantages, but there are drawbacks as well. Payouts to departing employees, for share buybacks, can be a cash drain. The same is true for regulatory requirements, including annual appraisals. In addition, ESOP participants lack diversification in their retirement plans because the primary holding is the sponsoring company’s stock. Therefore, companies that sponsor ESOPs also may offer a retirement plan such as a 401(k), where employees can defer some of their salary (and the tax on that income) in order to acquire other investments.

If the idea of using an ESOP as a retirement plan appeals to you, HLB Gross Collins, P.C. can help you evaluate the costs and the potential benefits.

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