In my last article, I provided an overview of the calculations behind taking benefits early or delaying benefits. In this installment, we were going to meet Pat and Val, a married couple with gender-neutral names, and review some of the simple and complex Social Security planning strategies available to them. Unfortunately, I have been fighting a headache for a several days and I cannot get by head around that topic just now. Instead I will fast forward to the next installment of the series – “I’m Not Making This Up” and “Other Social Security Tidbits”

Let’s start with the tidbits . . .

1. Will my benefits be impacted if I begin receiving them before full retirement age?
If you begin taking Social Security benefits before full retirement age and have too much earned income, you may be exposed to what’s commonly known as the “earnings test.” In a nutshell, you will forfeit $1 in benefits for every $2 you make over the earnings limit, which in 2015 is $15,720. If your reach full retirement age during this year, you will forfeit $1 of benefits for every $3 of earned income above $41,880 for the months prior to attaining full retirement age. The earnings test no longer applies once you reach full retirement age.

A less known tidbit: Any benefits forfeited because earnings exceed the limits are not lost forever. At full retirement age, the Social Security Administration will refigure your benefits going forward to take into account benefits lost to the test.

2. Will my benefits be taxed when I receive benefits after full retirement age?
Generally, if Social Security benefits were the only source of income, the benefits are not taxable. For those of us who have, or plan to have, other sources of retirement income, our Social Security benefits may be taxable. To quote the IRS:

“A quick way to find out if any of your benefits may be taxable is to add one-half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. The three base amounts are:

$25,000 – for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year

Kath note:    between $25,000 and $34, 000, up to 50% may be taxable more than $34,000, up to 85% may be taxable

$32,000for married couples filing jointly

Kath note:    between $32,000 and $44, 000, up to 50% may be taxable
more than $44,000, up to 85% may be taxable

$0 – for married persons filing separately who lived together at any time during the year”

Kath note:    you probably will pay taxes on your benefit

A planning tidbit: If you intend to take a withdrawal from your Traditional IRA and have flexibility regarding the timing, it may make sense to take part in one year and the balance in the next. By spreading the total amount over multiple years, you may be able to reduce the amount of Social Security benefits that are taxable. This would be an excellent reason to contact your tax advisor.

3. How much will my spouse receive while I am alive? After I pass away?
Let’s keep it simple and assume both of you are now at full retirement age and are applying for benefits, your spouse would be eligible for the greater of their benefit or 50% of your benefit during your lifetime. Upon your death, they would receive the greater of their benefit or 100% of your benefit.

4. How long do I need to be married before my new spouse can collect spousal benefits?
For spousal benefits (while you are alive), you must be married for at least one year.
For survivor benefits (after your death), you must have been married at least nine months (if death is due to accident or military duty, no length of marriage is required).

5. I am divorced; can I collect on my ex-spouses social security record?
If you were married for at least 10 continuous years, then you would be eligible for spousal benefits (while your ex-spouse is alive) and survivor benefits (after your ex-spouse passes away).

6. What is the maximum retirement benefit that someone can receive?
This year, the maximum monthly benefit at full retirement age (age 66) is $2,663.

Now for the “I am not making this up” . . .

There is a unique strategy available to individuals who have been married more than once and each time for over ten years. Previously in this article I shared that spouses have the option to receive the greater of their benefit or 50% of their spouses benefit while the spouse is alive and, upon the spouses death, they would receive the greater of their benefit or 100% of the deceased’s benefit. This holds true for divorced couples as well and the multi divorcé(e) has the ability to change which ex-spouse’s benefit they receive.

The below example was written by Laurence Kotlikoff on March 3, 2014 and was published on PBS’s website. I apologize for its length but it is an excellent example of “I’m not making this up” or “You’ve got to be kidding!”

“I thought I’d provide this outrageous tale of William Cooper Caldwell Gigolo to illustrate another peculiarity of our Social Security system.

William Gigolo worked not a day in his life, but instead lived off the relatively high earnings of three lovely wives — Sarah, Sally and Suzie. William is now 62 and has been single for two years. He’s a handsome devil (looks like Paul, actually). He refers to the three “S” gals as “My S exes.”

William’s very happy to have lived off of each S ex and to have helped himself to half their assets when they divorced. In each case, William waited until their 10th anniversary, chose a romantic restaurant, and over dessert, announced he was filing, not for Social Security, but for divorce.

Why wait 10 years? Because William knew that he had to be married 10 years, and not a day less, to qualify for divorcée spousal benefits and, when an S ex died, divorcée survivor benefits, on his spouse du jour (well du decade).

Since your ex has to be at least 62 for you to collect spousal benefits, William was careful to marry at least one S ex older than himself. This wife is Sarah, who is 64 and was the lowest earner. The next highest earner was Sally, who is 60. Suzie is the baby at only 56, but she earned more than the other S exes.

To maximize his lifetime Social Security benefits, William files for a divorced spousal benefit at 62 and starts to collect half of Sarah’s full retirement benefit, but reduced by 30 percent because he takes it early. Then, after two years, when Sally is 62, William files for a divorcée spousal benefit based on Sally’s earnings record.

And why not? Since he’s now eligible to collect on two S exes, he can file for benefits on both. He won’t get two divorcée spousal benefts — just the larger of the two. But Sally’s full retirement benefit is larger than Sarah’s, so he flips to hers. And here’s the lovely thing from William’s perspective: he’ll be able to collect half of Sally’s full retirement benefit, but reduced by only 13.3 percent, not 30 percent! Why? Because the reduction of benefits based on one spouse’s earnings record doesn’t carry over to collecting on another’s.

William’s cash-out plan is working. But there’s a part three. In six years, when Suzie reaches 62 and William is 68, he flips onto Suzie’s earnings record and starts collecting a completely unreduced divorcée spousal benefit since he doesn’t start collecting this particular benefit (which exceeds the other two) before he reaches his full retirement age.

Is William done with his optimization? No. Let’s fast forward to William’s 70th birthday, which is also the day that Sally, who waited until full retirement age to start collecting her benefit, dies. Sally’s full retirement benefit, while lower than Suzie’s, exceeds half of Suzie’s. So now William files for and begins collecting an unreduced spousal benefit on Sally’s record equal to 100 percent of Sally’s full retirement benefit.

Fast forward again. William is now 76 and Suzie dies (of a broken heart) having also waited until full retirement age to collect her retirement benefit. What does William do? He files for an unreduced survivor benefit based on Suzie’s earnings record.

Fast forward one last time. William is now 88. He’s met a very lovely 94-year-old named Sandra, who earned more than any of the S exes and is on her last legs. William realizes that he can marry Sandra and, after nine months, qualify for survivor benefits on Sandra’s earnings record. Presto, he whisks Sandra off to Las Vegas for a quickie marriage and, nine months to the day of their nuptials, Sandra falls, breaks her hip, and heads north by north.

William leaves the funeral early in order to get to the local Social Security office before it closes and file for a full (unreduced) survivor benefit on Sandra’s account.

This appears to be William’s last Social Security play, but he’s still a handsome devil and is on checking out his options.”

The article can be found here.

Next month we will meet Pat and Val.

Although this information was obtained from the Social Security website and other reliable resources, we make no guarantee of its accuracy. Journey Tree is not licensed to practice tax law and recommends that you consult your tax advisor regarding these matters.