Social Security’s Role in Wife’s Back-to-Work Decision
QUESTION: My wife has been a homemaker for more than 25 years. She is 60 years old and is thinking of returning to work. She would be entitled to receive about $240 a month in Social Security benefits at age 65 based on her previous employment. If she returns to work and earns $30,000 a year for the next five years, would her Social Security benefits increase significantly? What if she remains at home? Is she entitled to some sort of benefits for homemakers who have not been part of the work force for a long time?--C.F.L.
ANSWER: Yes, if your wife does return to work for the next five years and earns about $30,000 per year, the amount of Social Security benefits she will be entitled to receive at age 65 should be greater than what she is currently entitled to receive based on her earnings more than 25 years ago. The reason is quite simple: When your wife was in the work force 25 or more years ago, her contributions to Social Security were so small that she is entitled to a relatively low monthly benefit. If she begins earning $30,000 per year, her annual contributions to Social Security will be about $2,995, at the current withholding rate of 7.65% of earnings. And this amount will be matched by her employer.
However, before your wife rushes back into the work force, let’s explore all the angles. Of course, if your wife wants to return to work for the satisfaction a job offers, that’s one thing. But if she’s taking a job solely to increase her Social Security benefits, there are other factors to consider. When your wife turns 65, she is entitled to receive spousal Social Security benefits in an amount equal to 50% of your benefits at age 65. She could begin drawing these benefits when she turns age 65, provided that you have retired and have begun receiving your Social Security benefits. (She could also begin receiving spousal benefits at age 62, but they would be lower than if she waits until age 65.)
You have not provided us with sufficient information to evaluate what course of action you should take. However, if you were in the highest Social Security taxation bracket throughout your working career--and therefore eligible for the highest monthly benefit--your wife’s spousal benefits might be higher than anything she could qualify for on her own.
To find out where you stand and what course of action you should pursue, you should find out how much Social Security you are entitled to receive and compare half that amount to your wife’s current entitlement of $240 per month and whatever amount she would be entitled to receive if she earned $30,000 annually for the next five years. You probably will need the help of your local Social Security office to complete your analysis.
By the way, all taxpayers should know that there is a fairly easy way to find out whether your Social Security account is at the level it should be and how much you can expect to receive from Social Security upon retirement. Simply call (800) 937-2000. This toll-free number has been set aside exclusively for telephone requests for Social Security Form SSA-7004, “Personal Earnings and Benefit Estimate.” If you have difficulty getting through on the line, try the general Social Security request line, (800) 234-5SSA, and ask for the same form.
When you get the form, which asks your birth date, Social Security number and a few other questions, complete it and mail it back to the enclosed address. The Social Security Administration will then send you a listing of your Social Security-qualified employment earnings and expected retirement benefits.
If you think there is an error in the information, you should contact your local Social Security office. Be prepared to show agency officials appropriate tax returns or earnings statements to support your position. Agency officials say they cannot guarantee that they will be able to correct mistakes made more than three years earlier, and that’s why they recommend filing Form SSA-7004 every three years.
Pointers for Grandkids Before They Sell Stock
Q: Can you give me a few rules of thumb to consider when evaluating the sale of stock with large gains subject to tax? I gave our grandchildren shares of stock many years ago that are now worth nearly four times their original cost. I want to help them avoid any unwise cashing in of these shares.--R.C.B.
A: You no doubt know by now that the most you can offer your grandchildren is some grandfatherly advice; what they choose to do with the stock you gave them as a gift is their business. However, with that in mind, our advisers say you should ask your grandchildren to thoroughly consider the following points before selling their shares:
Do they really need the money? If not, there’s little reason to incur a large tax bill to generate some extra cash.
If they need the money, then the shares with the highest tax basis--if any--should be sold first to minimize the taxable gain. (Remember, taxable gain is determined by subtracting the tax basis, usually the original per-share cost, from the net sales price.)
Sale of the stock should ideally be timed for a year in which your grandchildren’s income is lower than usual--or their tax deductions are higher than usual. This, too, will minimize the tax bite. For example, if they have capital losses from investments one year, that could be the year to sell the shares to shelter some of the gain.
Also, if they use proceeds from the stock sale to purchase their first home, they should, ideally, time the stock sale to coincide with the first full year of mortgage interest payments to shelter as much of the stock sale gain as possible with the large amount of deductible mortgage interest.
IRS’ Double Standard on Sales to Relatives
Q: Several years ago, my husband and I purchased land in Colorado that is now worth a fraction of its original cost. Can we sell it to our son at its current market value and recognize a loss for tax purposes?--D.W.
A: No. The Internal Revenue Service does not allow tax losses on transactions between relatives. However, if you sell an asset to a relative at a gain, the IRS recognizes that profit and taxes you on it.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053 Too Late to Escape Real Estate Gains Tax
Q: Ten years ago, I entered into an installment sale of some real estate specifically to defer paying taxes--then assessed at 20% for long-term gains--on my profit. The note will be paid off later this year, and because of tax law changes, it looks as though I will pay at least 28% tax on my gain. It appears I outsmarted myself! Is there a “grandfather” program that would allow one to apply the tax rate that was in effect at the time of the original transaction? Obviously, had I known then of the changes forthcoming, I would not have done what I did. --M.D.P.
A: Unfortunately, you did outsmart yourself. Nothing in the tax code would allow you now to select the tax rate in effect when you originally sold the real estate. You are stuck, something that you usually can’t avoid when tax laws change and your crystal ball isn’t tuned into divining how Congress will handle the thorny issues of tax reform.
