social security

The Protective Filing Statement

When planning for your Social Security benefit, there is an additional tactic that you may never have heard of: the Protective Filing Statement. This statement is a way to apply for benefits without actually applying.

Huh?

At any time after you reach age 62, you can file the Protective Filing Statement (PFS) which will “protect” the date of acceptance as your application date, whenever you choose to apply in the future. And when you do apply, the PFS date will be considered your filing date – and you’ll get retroactive benefits back to that date.

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After the PFS is filed, the SSA will issue a notice indicating that you must file within six months. This doesn’t mean that you have to file within six months, it just means that, in order to retroactively file as of your protected date, your actual application must have been filed no later than six months after the protected date.

How does this work in practice? Let say that you reach age 62 in February this year. You’re actually eligible for benefits in March, since you weren’t 62 for the entire month of February… so you file a PFS in March. You’re not ready to collect benefits, but you want to protect your date. Then in July your company “reorganizes” (we all know that really just means layoffs). Instead of seeking other work, you decide to just go ahead and retire. When you file your application for Social Security benefits in August, your actual filing date can be retroactive to March, since you filed a PFS.

If your income for the year was low enough, you might go ahead and take the retroactive benefits – but the key here is that without the PFS you would forego those benefits altogether. It’s for this purpose that it makes sense to file a PFS from time to time if you’re delaying receipt of benefits sometime after age 62.

How to do it

There’s nothing magical about the PFS – it’s simply a statement you’ve made to the SSA indicating that you’re intending to file at some point in the future. You don’t have to set a date, you just need to indicate that you’re intending to file. Here are the requirements:

Must be in writing
Must indicate an intention to claim in the future
Must be signed by the applicant
Must be submitted to your local district office

And that’s it. A few words of caution are in order: Keep a date-stamped copy of your PFS. If you hand-deliver the statement (recommended) to the district office, ask the representative to photocopy the statement and date-stamp your copy. Occasionally these get lost, and without a copy of your statement, it will be impossible to prove that you submitted it.

If mailing the statement, make a copy beforehand, and then send the statement by registered or certified mail. This way you’ll have evidence of delivery.

It’s also important to note the six month limit for the PFS. After six months has passed, the PFS is no longer in effect, and if you apply at that stage, unless you’ve file a subsequent PFS, the date of your application is your filing date, with no retroactivity.

Tax Bill Higher Than You Expected?

Apr 18th, 2011

by jblankenship.

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Now that you’ve (hopefully) filed your return for 2010, you may have noticed that the bill was higher than you expected. This may be due to some subtle changes to the tax law that affected your return for this year. Listed below are some of the changes that you may have been impacted by:

Social Security taxation: Especially if you had unusual income taxed in 2010, such as a Roth Conversion, you could be subject to as much as 85% taxation of your Social Security benefit.

Alternative Minimum Tax: If you’ve been impacted by this, not only are your ordinary income tax items taxed at a higher rate, but your capital gains and dividends could be taxed at a rate higher than 15% as well. This happens for folks with incomes between $150,000 and $439,800 (or $112,500 and $302,300 for singles) as the AMT exemption phaseout occurs.

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Child Tax Credit: If your income is over $110,000 ($75,000 if filing Single), the Child Tax Credit reduces by $50 for each $1,000 over that limit. This has the effect of increasing the marginal tax rate by 5% for each child, as your income increases.

Passive Loss phaseout for rental realty: If your AGI is greater than $100,000, the deduction of up to $25,000 of losses from rental real estate is phased out up to an AGI of $150,000 when the deduction is eliminated altogether. This can increase the marginal tax rate by 50% ($25,000 credit eliminated as your income increases by $50,000).

There may be other reasons that impact your tax bill, but these are some that have recently come to light as typically occurring.

Disability Benefits at Retirement Age

Apr 8th, 2011

by jblankenship.

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Here’s a unique situation that I had never come across: what options do you have available to you when you’ve been receiving Social Security disability payments – and you’re nearing Full Retirement Age (FRA)? A reader recently asked this question as she and her husband are facing decisions with just such a situation…

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Disability Benefits at Retirement Age

As you reach FRA, your Social Security Disability Benefit will automatically convert over to a Retirement Benefit, at the same amount.

What does this mean? Essentially, once you reach FRA, since you’re now on a Retirement Benefit, you have all of the features available to you as if you had not received any benefit prior to this point and you’re now retired. So your spouse can collect Spousal Benefits based on your Primary Insurance Amount; Survivor Benefits are also available; and you can choose to Suspend your benefits at FRA (no need to File before suspending, you have effectively filed when your Disability Benefit converted to Retirement Benefits).

By Suspending, you can earn Delayed Retirement Credits (DRCs) of roughly 8% per year up to age 70, which will permanently increase your own benefit and your spouse’s potential future Survivor Benefit.

Obviously, there is no requirement for you to change anything at all once you reach FRA – you can continue receiving the Retirement Benefit the same as you have been receiving the Disability Benefit up to this point.

It’s an unusual situation, understandably, but something to keep in mind if you happen to be facing this circumstance.

Advice on Social Security Benefits

Apr 1st, 2011

by jblankenship.

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I get a lot of questions about when to take benefits, how to use File & Suspend most efficiently, and when to begin Spousal Benefits. And unfortunately, I am often at a loss for giving a specific answer to the individual, because I just don’t have enough information.

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Social Security planning has very many factors that must be considered – for example:

It’s important to consider earnings if you’re filing early and continuing to work (see Social Security Earnings Tests for more information), as this can impact the amount of benefits you actually receive.
Your health status and longevity are critical to the equation as well – since delaying strategies often rely on your longevity to achieve payback (more information in the articles Your Payback from Social Security and Coordinating Social Security Spousal Benefits).
Of course, your marital status is important to the equation as well. If you’re married, you have to think about Spousal Benefits and Survivor Benefits in addition to your own benefit. And if you’re divorced or widowed, additional considerations must be brought into the equation as well.
Probably the most important of all – do you need the money right now? Too often this factor is overlooked in our zeal to “get our money back”. As you’ll see in this article on delaying benefits, it can be very worth your while to delay receiving benefits – but again, this shouldn’t be done blindly.

Each individual’s circumstances has other factors to consider as well. Your overall retirement plan has to be the context against which these factors should be considered.

As you take these factors and others into account, it’s important to perform break-even analysis on your benefits at various ages, along with that of your spouse (if you have one). Then it’s up to you to decide what makes the most sense in your situation. If you have a trusted advisor that you can work with to help you with your analysis, all the better.

And lastly, if I can help you with this analysis, this is what I do for a living. As always, I am happy to help you understand the nuances of the various programs and all – the only thing I ask of you is that you pass the word along to your friends and acquaintances. It’s my hope that when questions about Social Security and other financial issues come up, I can help.

What Your Social Security Statement Is Telling You

Mar 25th, 2011

by jblankenship.

1 comment

Image via Wikipedia

We covered the Social Security annual benefit statement in depth in another article, but there is a portion of the statement that is a constant source of misunderstanding – the projection portion at the top of page 2.

If you’ll take a look at this portion of the statement, you’ll see a projection of your Social Security retirement benefits, at Full Retirement Age (whatever that is for you), at age 70, and at age 62. Also listed are the amounts that you would receive for Disability Benefits, as well as amounts that your family would receive upon your death as survivors. What gets missed for many folks is the part at the top which reads:

At your current earnings rate, if you continue working until…

With that short phrase comes a great deal of confusion and misunderstanding. What this means is that, when you receive this document, assuming that you are something less than Full Retirement Age (FRA), the statement reflects a projection of your future earnings from now until those projected ages (62, FRA, and 70) – and those amounts provided are based upon that projection.

If, for example, you chose to stop working at age 62 and delay receiving benefits until FRA, the benefit that you’ll receive will likely be less than the amount shown on your statement… because you did not continue earning at your current rate to FRA, as the projection assumes.

Another example is where you continue working, but your income has been reduced, due to layoff or other dramatic change in your employment. With the jobs outlook being the way it has been over the past few years, it’s not hard to imagine a situation where this might be the case.

There are several calculators available on the Social Security website that can help you to get a clearer picture of your actual benefit if your projected earnings will be something different than what you’ve experienced up to the present (or actually, up to two years ago, since that’s all the more that is generally covered with the statement).

Boosting Your Social Security Benefit

Mar 18th, 2011

by jblankenship.

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As we’ve discussed elsewhere, your Social Security benefit is calculated based on your highest 35 years of earnings over your career, indexed to the current year. So what impact can continuing to work past age 62 (or later) have on your Social Security benefits?

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Any year in your earnings history that had very little or no earnings covered by Social Security works against you – since the calculations assume 35 years of earnings. If you only had, for example, 30 years of earnings on your record and five “zero” years, these years with no earnings will reduce your average earnings that are used for calculating your benefit amount. Continuing to work, even for a minimal amount, will eliminate these zero years from your record for calculation.

In addition, if you’re earning a higher salary relative to your earnings record, some of the lower years’ earnings can be eliminated from your calculation record as well, thereby boosting your Social Security benefit by increasing the overall average.

Lastly, when you get your annual statement from the Social Security Administration, a projected benefit amount is reported. If you read the fine print, the projected benefit amount assumes that you continue to work up to the retirement age indicated, with your earnings remaining roughly the same as your most recent year.

If you retire at age 62 and wait to age 66 to begin receiving benefits, the amount of benefit that was projected for you at age 62 will be lower because you will have added zero years to the end of your working career. The estimate assumed that you continued working at (presumably) a high earnings rate relative to the rest of your record.

Proposed Social Security Wage Base Increases

Mar 4th, 2011

by jblankenship.

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October 19, 2011 update: the expected wage base increase has been confirmed as $110,100 for 2012. For more information, see this article.

The Social Security Administration has released the proposed figures for the increase in the wage base for taxation for 2012 and projected some figures for the years up to 2015. This is the limited amount of income against which Social Security withholding tax is applied.

For 2009 through 2011, the wage base has been static – at $106,800 for each year. The amount did not increase for these years since the average wage index (AWI) actually decreased from 2008 to 2009, and the modest increase in the index from 2009 to 2010 did not make up for the decrease in the prior year. For 2011, the AWI is expected to increase once again, by 3.08%. This sets the projected wage base for 2012 at $110,100, up a total of $3,300.

Future wage bases have been projected for the years up to 2015 as well: for 2013, the base is projected at $113,100; for 2014, $117,600; and for 2015, $122,700.

Keep in mind that these are, at present, only projections. The actual figures will be set in the fall, typically in October or November.

Also – in 2012, the temporary 2% reduction in the Social Security withholding tax will expire, so if the projected wage base of $110,100 does go into play, then the maximum amount of Social Security withholding that you can be assessed for the 2012 tax year will be $6,826.20, up from $4,485.60 in 2011.

For more information, see this article at Social Security Owner’s Manual.

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Social Security for the Self-Employed

Feb 25th, 2011

by jblankenship.

1 comment

As a self-employed small business owner, you have lots of plates to keep spinning, and lots of additional costs that you never dreamed of when you were employed by someone else (like health insurance, for example). Another cost that you have to deal with when self-employed is Self-Employment tax.

Self-Employment tax (SE tax) is essentially where you are paying both the employER and the employEE portion of the Social Security withholding tax. This means that, in most years, you are taxed at a rate of 12.4% on your first $106,800 of income (double the amount you’d have withheld if you were employed by someone else). This doesn’t count the 2.9% that you also have to withhold for Medicare tax – this is another matter altogether.

Note: for 2011, the rate is reduced by 2% due to the provision in the 2010 Tax Act to stimulate the economy. The rate is presently scheduled to go back up in 2012.

With this in mind, you might wonder if there are ways that you could reduce the tax…? One way might be to incorporate your business and reduce your income by taking dividends for a portion of the otherwise taxable income. By doing this, you would eliminate the SE tax, and then pay employER withholding and employEE withholding only on each paycheck that you provide yourself. The dividends would not be subject to Social Security tax, since they are not wages.

It’s important to note that such a strategy will have two important factors for you to consider:

Your earnings record will reflect the new, reduced amounts for income, so your future Social Security benefit will be reduced as well
You must be careful to pay yourself a reasonable wage, otherwise the IRS will consider your dividends to be taxable as income. It might seem clever to reduce your wages to a very low amount (or eliminate them altogether), but this will come back to haunt you when the IRS gets ahold of your return.

Incorporating your business may be a valid strategy to help reduce your tax costs – for other reasons beyond Social Security tax. But you’ll need to consider all of the consequences before you do this – one of the most important factors being that you will want to increase your retirement savings in order to make up for reduced future Social Security benefits.

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Your 2% Opportunity in 2011

Dec 31st, 2010

by jblankenship.

1 comment

By now you’ve heard the news from the 2010 Tax Act – one of the provisions is that during calendar year 2011, the Social Security withholding tax is reduced from 6.2% to 4.2%. This means that you have an additional 2% of your income, up to the $106,800 limit, available to you to do with as you wish. This is your opportunity to make a splash!

I think it would be a very good idea to bump up your 401(k) deferral by 2% if you aren’t already maxed out. If you have maxed out your 401(k), you could use the extra money to contribute to your Roth IRA, or put some money into your taxable investment account. No matter what, since this money was originally intended to be for retirement (if it had been withheld for Social Security, it would have gone to *someone’s* retirement), you should put it toward some variety of savings or debt paydown.

It’s not often that you get the opportunity to take control of your Social Security withholding, and many folks are chomping at the bit to do just that.

Don’t waste your opportunity – this is the chance you’ve been waiting for!

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