Q: If my wife takes the “spousal benefit” on my Social Security, which I have suspended until age 70, do we have pay taxes on that income? – Ron
A: Yep, you do. Social Security benefits are taxable if they exceed certain levels, and this applies to spousal and other benefits as well as your own retirement benefits. The rules can be a bit tricky. If you file a joint tax return, and your “combined” income is less than $32,000, you will owe no federal income tax on your Social Security benefits. If it’s between $32,000 and $44,000 a year, you will owe taxes on 50% of your benefits. Above $44,000, you would owe taxes on 85% of your benefits. Under current rules, you will never owe federal taxes on more than 85% of your benefits. These income brackets are not adjusted for inflation each year, so over time more and more people will owe taxes on their Social Security benefits. To determine your combined income as defined by Social Security, take your adjusted gross income (AGI) from your tax return, add any nontaxable interest you receive (from, say, a municipal bond), and then add half of your household’s combined Social Security benefits.
Q: After reading your article in Money, I thought the Start-Stop-Start strategy might work for me. I have called Social Security and they have never heard of this. Can you tell me the part of their regs which allows this method of claiming benefits? Thanks. —Phil
A: Start-Stop-Start is not an official name but a short-hand reference to a way of using Social Security’s rules for Suspending Retirement Benefits. If you have begun receiving benefits (the first Start), these rules permit you to suspend them (the Stop part) when you’ve reached your Full Retirement Age. Then, they will increase due to Delayed Retirement Credits until you resume them (the second Start part). Your suspended benefits will reach their maximum amount at age 70.
Q: My wife and I are both high earners. I am 68 now and am not taking Social Security benefits. My wife will be 66 in June 2017. Can I file for benefits and suspend and if I do, can she then receive half of my benefits now, even though she is not yet 66? What effect will this have on her own benefits, which she would like to defer until age 70? — Rao
A: If your wife files for a spousal benefit before she reaches 66 (which is defined as Full Retirement Age) she will not be able to file just for her spousal benefit. Under Social Security’s “deeming” rules, she will not be able to suspend her own benefits but will be required to file for them and her spousal benefit at the same time. She will not get both benefits but an amount that is roughly equal to the greater of the two. Also, because she is filing before her FRA, her benefits will be hit with Early Claiming Reductions, meaning that she will get an amount that is roughly equal to the greater of two reduced benefits! Unless you are in dire financial straits or facing a health or other family emergency, she should wait to file for a spousal benefit until she is 66. At that time, and assuming you have filed for and suspended your own benefit, she can file what’s called a restricted application for just her own spousal benefit. She will receive the full value of this benefit, which will equal half of your benefit as of your FRA. And she will be able to let her own retirement benefits increase by 8 percent a year until up to age 70.
Philip Moeller is an expert on retirement, aging, and health. He is co-author of The New York Times bestseller, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” and is working on a companion book about Medicare. Reach him at [email protected] or @PhilMoeller on Twitter.