Social Security May Benefit Spouses Differently
Q: I cannot figure out how much Social Security I am entitled to get. I began drawing benefits on my own account at age 62. I am now 65 years old and newly widowed. They tell me I am entitled to full widow’s benefits. Yet when my sister, whose husband is still alive, turned age 65, she did not get full spousal benefits because she had begun her own benefits at age 62. It doesn’t make sense to me. --R.B.
A: Some 55 years after its inception, Social Security remains one of the most complex and confusing programs offered by the government. Let’s try to explain why you and your sister are each receiving the benefits that you are.
Widows over age 65 are entitled to receive 100% of the benefits that their spouses were receiving--or were eligible to receive at age 65--regardless of whether they began drawing benefits on their own account at age 62.
However, women whose husbands are still living are not entitled to the full spousal benefit--50% of the wage earner’s amount--upon turning age 65 if they elected to receive their own benefits at age 62. (By the way, although we are using “husbands” and “wives” here as though Social Security benefits are distributed according to gender, that in fact is not the case. The Social Security Administration treats husbands and wives, widows and widowers, ex-wives and ex-husbands alike.)
Why the difference in benefit levels between spouses and widows of equal age? The most important reason is that a wife whose husband is still living gets the benefit of his Social Security payment as well as hers, while a widow has only a single payment on which to live. The original purpose of the Social Security program was to support entire families, not individuals. Payments to spouses are based on an overall minimum support level for a married couple: 100% for the primary wage earner and up to a maximum of 50% of that for the spouse upon turning age 65.
Because Social Security benefits for spouses, widows and divorced spouses generate the largest number of questions to this column, we have prepared a special Money Talk pamphlet with the answers to the 20 most frequently asked questions. The booklet, titled “Social Security Benefits,” costs $4, plus 33 cents tax. It is available only by mail by sending a check for $4.33 made payable to the Los Angeles Times to: Los Angeles Times Social Security Booklet, P.O. Box 60395, Los Angeles, Calif. 90052. Please allow three to four weeks for delivery.
Mobile Home Value Falls at Residential Rate
Q: I recently purchased a single family mobile home that I intend to use as a rental. At what rate may I depreciate the home? Does it qualify as a vehicle or do I treat it as a piece of real estate? --B.J.M.
A: A mobile home used as a residential rental must be depreciated over the 27.5-year schedule used for real estate. The reason a mobile home used as a rental does not qualify for the seven-year depreciation schedule afforded vehicles has nothing to do with whether it is a vehicle or a piece of real estate. The issue here is simply that the mobile home is being used as a residential rental and is entitled to the same depreciation rate as other residential rentals.
There’s No Need to Pay More in 401(k) Taxes
Q: Like many other taxpayers, I face a problem with the upcoming 20% withholding tax on certain 401(k) distributions. My 401(k) account includes both pretax and after-tax contributions and my employer is unwilling to separate the two amounts when I get my distribution. Either I get a check for the total amount made out to me or the total is transferred to an individual retirement account. In either event, I get hit with a tax bill. Help! --S.T.
A: Before detailing the three choices you have for resolving this conflict, let’s quickly recap what’s going on here. Beginning Jan. 1, the federal government will start imposing a 20% withholding tax on 401(k) disbursements if taxpayers take possession of the money rather than having it rolled over directly into a qualified IRA. At the same time, you correctly realize that after-tax 401(k) contributions cannot be rolled over into a tax-deferred IRA without being subject to taxation again upon their withdrawal.
What can you do since your employer won’t separate your 401(k) funds between pretax and after-tax amounts? You could rush and take your distribution immediately before the withholding law takes effect Jan. 1. This way, you can divide your distribution yourself, rolling over the pretax amount into a qualified IRA and keeping the after tax money to spend or invest as you choose.
If you can’t make this deadline, you can roll over the entire amount into an IRA and withdraw the after-tax portion as a “correction of excess contribution.” Although the law permits taxpayers to make such corrections up to April 15 following the tax year in which the transaction was made, you should actually get it done as quickly as possible. Why? Because the withdrawal must include any earnings generated by the excess contribution. The faster you make the withdrawal, the simpler the computation. Another reason to make the withdrawal quickly is that the IRS requires you to report any earnings generated by the excess contribution on the tax form you file for the year in which the excess contribution was made.
Your third choice is to fight your employer’s improper procedures. As a result of the new 401(k) withholding practice, companies are supposed to segregate pretax and after-tax 401(k) contributions. Your employer should be following these guidelines.
