Social Security: Ask RustyWindfall Elimination Provision; Taxing Social Security Benefits; and Ex-Spouse Benefit - Does it affect mine?By RUSSELL GLOOR,
December 07, 2017
(SitNews) - Ask Rusty - WEP - Windfall Elimination Provision Dear Rusty: During my first career, which lasted about 25 years, I worked for companies that withheld Social Security FICA taxes from my income. In my new second career my employer doesn't take Social Security from my wages, but I'll still be eligible for a company pension after 15 or so years of service. From my co-workers I've heard about something called "WEP" which could affect my Social Security benefits, but when they try to explain it I get totally confused. Can you clarify? Signed: Changed Careers Dear Changed: If you work in your second career long enough to earn a pension, "WEP" will, indeed, affect your future Social Security benefit. WEP, the Windfall Elimination Provision, applies to those who are entitled to a "non-covered" pension from an employer who did not withhold FICA Social Security taxes from their earnings, and who is also entitled to Social Security benefits from other employment which did. Since the Social Security benefit calculation is weighted to replace more income for lower-earning workers, dual-benefit recipients were getting proportionately higher income replacement than truly low-income workers, causing Congress to enact WEP in 1983. Social Security's standard formula for computing your benefit includes segmenting your average indexed monthly earnings into 3 portions called "bend points", multiplying each portion by a percentage and totaling them. A majority of your benefit amount comes from the first bend point, which is normally 90% of the first $885 of your average monthly earnings (for someone applying in 2017). The WEP reduction is computed by adjusting the percentage used in that first "bend point" to something less than 90%, depending upon the number of years of Social Security covered employment you had. If you had 20 or fewer years of Social Security substantial earnings, the percentage used in the first bend point will be 40%, rather than 90%. If you have more than 20 years of Social Security covered earnings, the first bend point percentage increases by 5% for each year over 20. Since 90% is the normal first bend point computation, if you have 30 or more years of substantial Social Security earnings, WEP doesn't apply. In your case, since you have 25 years of Social Security employment, your first bend point percentage will be 65% rather than 90%, so your first bend point amount (using 2017 numbers) would go from $796.50 to $575.25, thus reducing your monthly Social Security benefit by about $221.25. The reduction amount will become $214.00, which is the maximum WEP reduction for someone first applying for benefits in 2017 with 25 years of substantial Social Security earnings. There are some other factors that come into play with WEP:
So, if you remain in your second career long enough to earn a pension, then WEP will eventually affect the Social Security benefit earned from your first career. Hopefully, knowing the above information gives you an opportunity to manage the level of impact. Ask Rusty - Taxing Social Security Benefits Dear Rusty: My wife started collecting Social Security at her full retirement age of 66. I am 60 and still working, and I think it is unfair that we must add her Social Security earnings to mine when we file taxes. She has also worked some this year. Do we need to add this amount she received to our wages when we file? Signed: Overtaxed Dear Overtaxed: We regularly hear from people who, like you, are upset to find that their Social Security benefits can contribute to their tax liability. After all, you paid into Social Security with your taxable earnings so benefits shouldn't be taxable, right? Well they weren't when Social Security was first enacted in the late 1930's. But way back in 1983 Congress changed that to make up to 50% of benefits taxable if your income was over a certain limit, and then in 1993 another income threshold was added to make up to 85% of benefits taxable. And yes, since you're married and file jointly all of your combined income, including any earnings either of you have, affects the amount of your Social Security benefits that will be taxable. Without getting into the reasons or fairness, here's how taxing Social Security works: Social Security uses what's called "provisional income" to determine if your benefits are taxable. Provisional income includes the Adjusted Gross Income (AGI) amount on your tax return, with certain deductions (i.e., tax-exempt interest) and any non-taxable income added back in, plus 50% of you total Social Security benefit - in other words your total gross income plus half of your total annual Social Security benefit. If your provisional income exceeds certain levels, a portion of your Social Security becomes taxable income; if it doesn't exceed those limits your benefits aren't taxable. The income levels to determine tax liability are different depending upon whether your tax filing status is "single" or "married filing jointly". Single people with provisional income of $25,000 or less and married couples filing jointly with provisional income of $32,000 or less pay no income taxes on their benefits. For single people with provisional income between $25,000 and $34,000 and married people with provisional income between $32,000 and $44,000, up to 50% of their benefits are taxable. And for those over those income thresholds, up to 85% of benefits are taxable. If there's any good news in this, it's that only your gross income in excess of those thresholds count when computing the amount of your Social Security that is taxable. Take, for example, a couple whose total provisional income is $60,000, about $15,000 of which is one half of their total combined Social Security benefits. Zero percent of the first $32,000 of provisional income is taxable; 50% of the income between $32,000 and $44,000 ($12,000) is taxable; and 85% of the provisional income over $44,000 is taxable. So to do the math for this example:
These three segments are added together to compute your taxable Social Security income. In this example for a married couple with $60,000 in provisional income, $0+$6000+$13600 equals $19,600 in taxable Social Security income. In other words, $19,600 of their total $30,000 Social Security benefit is taxable (about 65% in this example). So yes, adding Social Security income to your wages can have tax implications but it is the current law. Although there are active proposals in Congress to eliminate taxing of Social Security benefits, none have gained enough traction to predict success. For this reason, you should always consult with a Tax Advisor whenever any additional income might increase your tax liability. Ask Rusty - Ex-Spouse Benefit - Does it affect mine? Dear Rusty: Two years ago, after 34 years of marriage, my wife divorced me. She was a full time homemaker most of those years. Is she entitled to half of my Social Security benefit when I collect at age 62? She currently gets half my pension from work, and having her also take half of my Social Security benefit would kill me financially. Signed: Going Broke Dear Broke: Yes, because you were married for more than 10 years, when she becomes 62 your ex-wife will be entitled to receive Social Security spousal benefits based upon your work record (even if she didn't work). What she gets, however, will not be taken from or otherwise affect your Social Security benefit amount. If your ex waits until her own full retirement age to apply, she can get 50% of your Primary Insurance Amount (PIA) - the amount you will be entitled to at your full retirement age. This is true even if you apply earlier at age 62. But if she starts spousal benefits before she reaches her full retirement age, her benefit amount will be reduced. Assuming her full retirement age is 66, if she applies for spousal benefits when she's 62 she'll only receive about 35%, rather than 50%, of your PIA. Also, you don't have to be already collecting retirement benefits in order for your ex-wife to collect her spousal benefits; you only have to be eligible to collect. But no matter what your ex-spouse receives as a result of your marriage, the benefit you receive will not be affected and you will still get the full amount of Social Security that you are entitled to at the age you start collecting. Please note that if you start your own benefit at age 62 as you say you intend, it will be reduced to about 74% of what it would be if you waited and applied at your full retirement age (which I assume is about 66). This is not meant to discourage you from applying early if your circumstances demand it, but only to make you aware that taking your Social Security benefit early will result in a permanent reduction in the amount you receive. The Foundation welcomes questions from readers regarding Social Security issues. ©2017 Russell Gloor, AMAC Certified Social Security Advisor http://amacfoundation.org The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed in this article are the viewpoints of the AMAC Foundation's Social Security Advisory staff, trained and accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). NSSA, the AMAC Foundation, and the Foundation's Social Security Advisors are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other state government. Furthermore, the AMAC Foundation and its staff do not provide legal or accounting services.
Representations of fact and opinions in comments posted are solely those of the individual posters and do not represent the opinions of Sitnews.
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