It’s Easy to Offset Tax-Saver Account’s Dent on Your Social Security Benefits
Q My employer is pushing hard for all employees to open flexible spending accounts to cover the cost of day care and medical care. I know the money I put into these accounts escapes income tax, but how does it affect my Social Security?
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A It may reduce your future Social Security benefits, but don’t panic. There’s an easy way to offset the damage.
Contributions to flexible spending accounts (also known as tax-saver or 125[c] plans) escape income, Social Security and Medicare taxes. That’s a big advantage, because it cuts your immediate tax bill while helping you pay for child care or unreimbursed medical expenses that you incur throughout the year. But because the contributions are not subject to Social Security taxes, they’re not counted for purposes of determining your benefit when you retire. That means you may get somewhat less from Social Security than if you had not taken advantage of the flexible spending account.
How much less is hard to say, because it depends on your lifetime earnings and when you retire, among other factors. Avram Sacks, a Social Security analyst with tax research firm CCH Inc., estimates that someone with average earnings who retires at age 62 would get about $50 a month less in benefits, in year 2000 dollars, if she contributed the maximum $5,000 to a flexible spending account each year for 20 years.
Is that a reason to avoid flexible spending accounts? Hardly. You need only put aside a fraction of your tax savings to more than make up for the small amount of Social Security money you might lose.
If you’re in the 28% bracket, for example, you’ll save $1,400 in federal income taxes by contributing $5,000 to a flexible spending account, plus about $383 in Social Security and Medicare taxes. You would need to contribute only about $300 a year to a retirement account over the next 20 years to offset the hit to your Social Security benefit, assuming your contributions earn an average 8% return.
If you make much more than Social Security’s maximum “wage base,” the issue is probably moot. The wage base, $76,200 this year, rises to $80,400 next year. That’s the maximum salary Social Security takes into account when figuring benefits.
Old Debts Haunt Bride-to-Be
Q Could you let me know how people can write up a legal document saying they are not responsible for each other’s debts incurred before marriage? I need this information quickly because I’m getting married this weekend. I’d have done this sooner but I was unaware there was a problem on my credit report. It looks as if two items from 10 years ago will hurt our chances of getting a mortgage.
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A Most brides have a few other things to think about the week before their wedding--which is a good thing, because legal documents affecting your finances shouldn’t be drawn up in a rush.
You’re probably worrying over nothing. First of all, people typically are not responsible for each other’s debts before marriage. That happens only after you say “I do.”
Furthermore, you probably can ask to have both items removed from your credit report. Negative marks can stay on your report for only seven years; a bankruptcy can be reported for 10. Even if you did declare bankruptcy, the mark is likely to be gone by the time you’re ready to apply for a mortgage.
If you really want to, you can try to keep your finances legally separate in marriage, but you’ll want to consult a lawyer about how to do so, and you’ll need to practice extraordinary vigilance in keeping your money separate.
There are significant legal, financial and psychological benefits to combining your finances as a married couple, however. That’s why many gay activists want the legal protections that come with marriage. Separating finances is not a step that the vast majority of couples want to take.
Now relax and enjoy your wedding.
Disinherited From Living Trust
Q If an adult child is purposely omitted from a living trust, is there a statute of limitations that prevents the disinherited person from bringing suit to attempt to upset the trust provisions?
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A If you’re going to disinherit an adult child, you should do it very carefully. If you simply omit the person from your will or living trust and she otherwise would have inherited under state law, she could argue that you inadvertently overlooked her.
Estate planning experts say it’s best to at least mention the person in your will or trust and make it clear that you are not leaving her anything. (You may need to have both a will and a living trust, because some states require that disinheritance be accomplished through a will.)
Your question about a statute of limitations implies that you might be hoping your child doesn’t learn about the provisions of your trust until it’s too late. You should know that in California, people who would have otherwise inherited are entitled to ask for a copy of the living trust when it becomes irrevocable, which is typically when the creator dies.
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Liz Pulliam Weston is a personal finance writer for The Times. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk columns, visit The Times’ Web site at https://www.latimes.com/moneytalk.
