Spouse’s Death Can Change Benefits
Q: I began drawing Social Security at age 70 and because of the delay, my benefits are 115% of what they would have been at age 65. My wife began drawing benefits on her own account at age 62. When I die and my wife begins drawing widows’ benefits on my account, what amount will she be entitled to receive--the 115% that I was getting, or the basic amount I would have received at age 65? -- W.K .
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A: At age 65, widows, widowers and surviving divorced spouses are all entitled to receive the amount their deceased spouse (or ex-spouse) was drawing at the time of his or her death. Under this ruling, your wife would be entitled to receive the 115% benefits that you had been drawing at the time of your death.
Please note: This rule is decidedly different than the one covering simple spousal benefits. In cases where a worker delays receiving benefits until after age 65, benefits for spouses age 65 or older are limited to a maximum of 50% of what the worker would have received at age 65. Spouses are entitled to a share of the worker’s “delayed benefit” only upon the worker’s death.
You didn’t ask, but readers will certainly want to know more about how these rules apply in different situations.
If the deceased spouse had not yet begun drawing benefits but was older than 65, surviving spouses are eligible for whatever the deceased would have received at the time of his death. If the deceased was under age 65 and had not yet begun drawing benefits, surviving spouses and ex-spouses are entitled to receive whatever the deceased would have qualified for at age 65.
However, in these circumstances, the surviving spouse must wait until turning 65 to claim this full amount. Benefits are reduced when surviving spouses claim them before turning 65. In these cases, the surviving spouse may choose to draw his or her own benefits until turning 65, then switch to the higher widows’ or widowers’ benefits.
If the deceased began drawing benefits before turning 65, surviving spouses and ex-spouses under 65 face some choices. If they elect to draw benefits immediately, they are entitled to receive 100% of what the spouse had been getting at the time of death or 82.5% of what the spouse would have received at age 65--whichever is larger . If available, the surviving spouse may draw on his or her own benefits and switch at age 65 to full spousal benefits.
Exercise Caution When Deducting Points
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Q: I refinanced my $300,000 mortgage a year ago and added the $6,000 in points to my outstanding loan balance. I am refinancing again right now. May I deduct the portion of the points from the first refinancing that remained unpaid now since I am starting my loan all over again? -- M.F .
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A: You are not entitled to any deduction until you have actually made some kind of payment. And, if you think about what you are proposing, you will realize that by tacking on the points to your outstanding loan balance, they have not yet been paid. Only taxpayers who pay cash for their refinancing points are allowed to deduct the remaining unamortized balance upon a subsequent refinancing.
That said, there may still be something for you to deduct. If you put any cash into your first refinancing, our experts say you may treat that money as though it had been used to pay for the points. Under these circumstances, you would be entitled to deduct that amount in upon the second refinancing.
Tax Liability on Adjusted Sales Price
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Q: I am 58 years old and want to sell my home for $330,000 after selling expenses. I plan to take the $125,000 profit exclusion and move into a rental I have owned for the last 15 years.
My tax basis in my current home is $65,000 and I figure that I will have a taxable gain of $140,000, on which I will owe about $56,000 in taxes. May I just invest the $56,000 in permanent improvements to the rental to avoid the tax bite?-- R.J.M .
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A: Absolutely not! You would have to invest more than $65,000 (your tax basis in your current residence) in permanent improvements to the replacement residence to get any tax benefit. To avoid a tax bite entirely, you would have to invest $205,000, which is your sales proceeds minus the $125,000 exclusion. This amount is generally referred to as the revised adjusted sales price.
The amount of your actual tax obligation on any gain--in your case, your calculations place it at $56,000--is completely irrelevant in determining the amount you must invest in a replacement residence. The relevant figures are your net sales proceeds (or, for taxpayers invoking the exclusion, the revised adjusted sales price) and your taxable basis.
If only a portion of the net sales proceeds are invested in a replacement residence within 24 months of the sale, taxpayers are liable for taxes on the difference between the net sales proceeds and the replacement home’s purchase price.
If no replacement home is purchased--or no permanent improvements to existing residences are made--the taxpayer is liable for taxes on the entire gain. Under these circumstances, the gain is calculated by deducting the tax basis--$65,000 in your case--from the revised adjusted sales price--$205,000 in your case. This would give you a taxable gain of $140,000.
Withdrawals From Multiple IRA Accounts
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Q: My individual retirement account funds are distributed among several banks. When I finally begin taking mandatory distributions, must I take the minimum from each account, or may I withdraw the combined minimum total from the one account of my selection? -- A.A.A .
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A: You may make the withdrawal from whatever account or combination of accounts you want, provided that you indeed do take the minimum required distribution. The minimum withdrawal should be calculated based on the total in all IRAs. You would be wise to notify the trustees of the accounts you do not touch of your decision because these trustees might review your account activity, determine that you had not made the proper withdrawals and force you into a lengthy discussion. Worse yet, they could just calculate the minimum required withdrawal and send you a check for it.
