Social Security Benefits Based Only on Earnings

Q A while back you wrote that the Social Security Administration now counts credits toward benefits based on earnings, not actual time--or quarters--worked during a calendar year. However, the Social Security folks in my town do not agree with you. Will you please verify your information?

--A.Y.

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A The Social Security Administration hasn’t counted “quarters” for benefits since 1978, when it changed its method of crediting

work toward Social Security coverage. Now, coverage is determined only by the amount of money you earn, not the period of time during which it was earned.

For 1997, every $670 in taxable earnings (last year it was $640) counts as one credit (formerly called one quarter) toward the minimum of 40 credits required for Social Security benefits. It doesn’t matter when during the year that money was earned; the only rule is that you may earn only four credits per year. Thus, it will take at least 10 years to qualify if you haven’t earned any credits previously.

So your first $2,680 of taxable earnings this year will give you all four credits you can earn this year. It doesn’t matter if it takes you a month, a week, a day or--in the case of sports or entertainment superstars--an hour to make the money.

Your contact at your local Social Security office should know this because this method of crediting work has been in effect for almost two decades. Perhaps there is some other issue complicating your story that you did not mention. For example, is there a question about when you were paid? Earnings count for the period in which they are paid, not earned, so if you worked in December and were paid in January, the earnings will count toward the later year, not the earlier.

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Q My divorce settlement called for my ex-husband to pay alimony of $4,000 per month for seven years. After that time, I was to sell the house and give him 40% of the profit. He did not pay the alimony, and I was advised to accept a modification in the settlement, giving me 100% of the profit, including the approximately $350,000 that he was to have paid me in alimony. The house is worth about $800,000; our tax basis is about $225,000. My potential taxable profit is well over $500,000. Am I allowed to reset the tax basis to account for the $350,000 in alimony that I essentially traded for equity in the house?

--R.B.

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A Section 1041 of the Internal Revenue Code provides that if the home is sold from one spouse to another “incident to a divorce,” the selling spouse (in this case, your husband) does not have a taxable gain. Further, it says the buying spouse (you) keeps the original tax basis of the home, not its increased value based on the price assigned to it at the time the property is divided.

Even though your arrangement was not, technically speaking, a sale with money changing hands, it is covered by the above-cited tax code, and you are not permitted to reset your tax basis in the house by the alimony you exchanged for complete ownership of the house.

But, says Violet Woodhouse, an Anaheim accountant and lawyer specializing in divorce-related tax and legal matters, you have little cause to complain. Woodhouse argues that if you had actually received the alimony, it would have been fully taxable income, taxed at least 28% by the federal government. If you had a job, your tax bracket would have probably been higher.

Instead, by trading the alimony for the equity, Woodhouse says, you are entitled to shelter (exclude from taxation) $125,000 of the gain, assuming you are over age 55. Further, she notes that because your home sale profit is considered a capital gain, you are subject to a maximum 28% federal tax rate. Finally, you are entitled to deduct from the sales price your home’s entire tax basis without having to split it with your ex-husband.

Division of home equity typically works to the advantage of the selling spouse. But in your case, because no money actually changed hands, you will not be similarly harmed, and may come out ahead.

By the way, our experts have repeatedly advised that because of the inequity inherent in these deals, the purchase price between spouses should be negotiable. Attorneys and accountants should be consulted before anything is signed, in order to unravel tax ramifications.

Finally, you should know that selling (or trading) a portion of the family house to an ex-spouse does not trigger a reassessment for property tax purposes.

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Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053, or send e-mail carla.lazzareschi@latimes.com