Lehigh Valley Woman – Finance Section – October/November 2012
by Laurie A. Siebert, CPA, CFP®, AEP® Vice President, Valley National Financial Advisors
One of the best strategies for planning for the unknown is doing your homework so you know what to expect. This applies to two important, hot top- ics right now: (1) when to take Social Security, and (2) a new tax, referred to as the Medicare Surtax. These are so little understood that rather than say “Beware,” let’s say “Be Aware!”
Social Security
Simply put, Social Security benefits can be described as your own “earned benefits,” your “spouse’s benefit” and your “survivor benefit.” If you are married but have never worked or didn’t earn very much, you can collect on your spouse’s record if it’s higher. When should you take benefits, and when can you collect on your own re- cord or your spouse’s record? It depends and it helps to know your benefit.
Your benefit is based on how many years you worked, how much you earned, and when you start collecting. You can get additional information, as well as a statement of your benefit, after setting up an online account directly from the Social Security website www.ssa.gov.
Age 62 is the earliest age that people who have earned enough credits to qualify for benefits can begin collecting,
but if they collect early, they permanently reduce their benefit. Full retirement age ranges from age 66 to 67, depending on when you were born. If you work past full retirement age or postpone collecting until after full retirement age, you earn a premium on your benefit.
Someone who retires at age 62 and has no other means of support may have to collect early despite a permanent reduction of benefits. On the other hand, if someone has retired at 62 and has enough resources to fund their cash needs without the Social Security benefit, they may want to consider waiting to collect so that they can draw a higher benefit. Depending on if you live past your projected life expectancy, this could give you higher benefits over your lifetime.
Collecting on your own record or your spouse’s
This is probably the most complicated and most important element in your Social Security benefit planning.
Collecting early perma- nently reduces benefits and does not give you the option on which record to collect. Postponing until full retire- ment age gives you options such as “file and suspend” and “claim now; claim more later.” For a more detailed explanation, email me at lsiebert@valleynational- group.com for a copy of a complimentary newsletter Creative Social Security Strategies — Understanding the Nuances. It’s complicated and you want to “be aware” of all the scenarios and how to maximize your options. Additional information not mentioned here is also avail- able at www.ssa.gov.
Medicare surtax
What is it?
This is a new tax that is referred to as the Medicare surtax because it was enacted to help finance the healthcare reform. Starting in 2013, there will be a 3.8% surtax on net investment income and a 0.9% surtax on earned income BUT let’s breakdown if this really applies to you.
To whom will it apply?
The earned income surtax will apply to higher income households. It applies to wages and self-employment income in excess of $200,000 for single taxpayers and $250,000 for married taxpayers. If your earnings are less than that, then this Medicare earned income surtax does not apply. The employer will withhold the additional amount if they know that you are subject to it. If you have several jobs or self-employment income, or if you’re married and your wages together are over the threshold, then you will be responsible for paying the tax either at tax filing or through estimated tax payments. This same income will NOT be subject to the Medicare surtax on net investment income.
The 3.8% surtax on net investment income is more complicated. It applies to the lesser of net investment income or the excess amount over a “modified adjusted gross income” (MAGI) threshold of $250,000 Mar- ried filing jointly or $200,000 Single. So, if your MAGI
is $50,000 and you have $200 of interest, you will not be subject to the Medicare surtax on net investment income because you are not over the MAGI threshold. If your modified adjusted gross income is $260,000 (married) and your interest income is
$200, you would be subject to the 3.8% tax on the lesser of number — $200 — re- sulting in a surtax of $7.60. Know if it will apply to you. If it does, plan for it. There are a number of strategies to help mitigate its impact.
Tune in to “Your Financial Choices” Radio every Wednesday from 6-7 p.m. on WDIY 88.1 FM
Be proactive, not reac- tive. Being aware is the first step in making the best of your financial choices. Let me know if you need assistance in planning for either and don’t be scared, be aware!
