Social Security Ideas for Married Couples

The decision regarding what age to begin receiving Social Security benefits can be complicated. The decision is further complicated if you are married, because spouses’ ages, estimated benefit entitlements, and life expectancies should factor into the decision. As each individual approaches retirement age, they as a couple have a unique set of fiscal needs and goals. There are several different scenarios that should be considered before a decision is made. Below are examples of two possible courses of action.

File and suspend
Generally, a husband or wife is entitled to receive the higher of his or her own Social Security retirement benefit (a worker's benefit) or as much as 50% of what his or her spouse is entitled to receive at full retirement age (a spousal benefit). But, according to Social Security rules, a husband or wife who is eligible to file for spousal benefits based on his or her spouse's record cannot do so until his or her spouse begins collecting retirement benefits. There is an exception--someone who has reached full retirement age but who does not want to begin collecting retirement benefits right away may choose to file an application for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.

The file-and-suspend strategy is most commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse's earnings record than on his or her own earnings record. Using this strategy can potentially boost retirement income in three ways: 1) the spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70, thereby increasing his or her retirement benefit by as much as 32%; 2) the spouse with lower earnings can immediately claim a higher (spousal) benefit; and 3) any survivor's benefit available to the lower-earning spouse will also increase because a surviving spouse generally receives a benefit equal to 100% of the monthly retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death.

File for one benefit, then the other
Another strategy that can be used to increase household income for retirees is to have one spouse file for spousal benefits first, and then switch to his or her own higher retirement benefit later.

Once a spouse reaches full retirement age and is eligible for a spousal benefit based on his or her spouse's earnings record and a retirement benefit based on his or her own earnings record, he or she can choose to file a restricted application for spousal benefits, then delay applying for retirement benefits on his or her own earnings record (up until age 70) in order to earn delayed retirement credits. This may help to maximize survivor's income as well as retirement income, because the surviving spouse will be eligible for the greater of his or her own benefit or 100% of the spouse's benefit.

This strategy might be used when both spouses have substantial earnings but do not want to postpone applying for benefits altogether. Louis files for his Social Security retirement benefit of $2,400 per month at age 66 (based on his own earnings record), but his wife Sue wants to wait until age 70 to file. At age 66 (her full retirement age) Sue applies for spousal benefits based on Louis's earnings record (Louis has already filed for benefits) and receives 50% of Louis's benefit amount ($1,200 per month). She then delays applying for benefits based on her own earnings record ($2,100 per month at full retirement age) so that she can earn delayed retirement credits. At age 70, Sue switches from collecting a spousal benefit to her own larger worker's retirement benefit of $2,772 per month (32% higher than at age 66). This not only increases Louis and Sue household income but also enables Louis to receive a larger survivor's benefit in the event of Sue's death.

Every couple’s situation is unique and various scenarios should be considered before the decision to begin receiving Social Security benefits is made. Contacting the Social Security Administration during your decision process may be beneficial. The website is www.socialsecurity.gov.

Applying the Tax Basis and At Risk Rules to Partners by Karla Hopkins

Individuals who invest in partnerships need to be aware of rules that limit the ability of the partner to deduct losses. Individual partners who have been allocated a loss must satisfy three separate loss limitations before the loss can be used. The loss limitations, in the order in which they apply are, Tax Basis limitations, At Risk limitations, and Passive Loss limitations. Here we will address the first two.

A partner’s share of losses is limited to his Adjusted Tax Basis at the end of the year. In general terms, Basis includes money contributed, the adjusted basis of property contributed plus taxable income and tax exempt income allocated to him. These amounts are reduced by losses, nondeductible expenses and distributions allocated to him. A partner’s Basis is further adjusted by liabilities of the partnership that he is liable for. Losses that exceed the partner’s basis are suspended to a future year when Basis may be restored by future income or contributions to the partnership.

The second limitation is called At Risk. The amount At Risk includes the amount of money and adjusted basis of property contributed, amounts borrowed with respect to the activity to the extent the partner is personally liable or has pledged property as security for the debt and amounts borrowed by the partnership for holding real property for which no person is personally liable for repayment. The amount At Risk is also increased and decreased by the income and deductions of the partnership each year. Unlike basis, At Risk can go negative from items other than losses. The consequences of a negative At Risk amount are potential for recapture of previously deducted losses as income in the year the amount At Risk is negative.

When a partnership is initially funded with debt and incurs losses; the debt, while providing Tax Basis for deducting the losses, may limit the losses due to the At Risk rules. Losses suspended due to the At Risk rules may later become deductible in the year under the At Risk rules even when the Tax Basis has already been reduced.

When a partner’s Tax and At Risk Basis have been substantially diminished, losses allocated to the partner may not be deductible, and distributions to the partner may result in income recognition. These limitations are calculated each year and it is important for a shareholder to understand them and to maintain accurate and current records of their Basis. The partnership does not always provide the information to its shareholders. The calculation is especially important in the year that the partnership interest is terminated or sold.

A partner may avoid the Tax Basis and At Risk consequences by being aware of his tax basis and amount at risk and by taking measures to increase these amounts prior to the anticipated event.

The above is meant to be only a brief and general overview of the Tax Basis and AT Risk rules of partnerships. To calculate your basis requires a detailed evaluation of the partnership agreement and other relevant partnership elections.