Vacstion and sick leave consequendes at retirement

[erchess]

A client retired from one job at age 63 in December of 2012. She continued to draw a pension from a long ago job and she began to draw Social Security. In January of 2013 the taxpayer received a substantial check from the employer for accumulated sick and personal leave. Now she is concerned that since she continued to work her second job and since the total of what the former employer paid and what she expects to earn for the year at the second job is about 12K she wonders if she is looking at having to repay some of her Social Security. This question is actually coming from her husband who is the family's tax and money manager and who wants her to quit the second job to avoid having to repay any Social Security. Are the monies from the former employer paid in 2013 going to have any tax consequences and if so will they be reported on a W2 or what and will they have any impact on Social Security?

[Burke]

They will be reported on a W-2 and factored into taxable Social Security on the tax return. There is nothing she can do about that. Social Security will use Line 7 and W-2 income to calculate any pay-back of benefits necessary. 12K will not trigger it. Maximum she can earn for 2013 is $15,120 without paying back benefits, so if it is under that, no problem. I believe if she goes over that and pay-back comes into play, there is a form she can provide SSA to indicate whatever portion of that income was accrued vacation/sick/personal leave earned in a prior year and they will adjust.

[erchess]

TY Burke

My numbers were actually low. Pay from the second job is 9K to date and because the job is in retail Christmas will push her past 14K just on the job and meanwhile from the first employer we are looking at 4K. So based on what you are saying a form will have to be files with SSA backing out the leave related pay and then by the skin of her teeth no repayment. When can this form be filed and how does the taxpayer obtain it?

[veritas]

Since I'm getting closer

To collecting social security, I did a little looking and found this:

If you work for wages, income counts when it is earned, not when it is paid. If you have income that you earned in one year, but the payment was made in the following year, it should not be counted as earnings for the year you receive it. Some examples are accumulated sick or vacation pay and bonuses.

[erchess]

Interesting Point Veritas

TY for the post but where did you find it? Also for Veritas or anyone who has an opinion to offer, how do you apply it to a prior year when you have a W2 for the current year? Also if the money in question does get applied to last year their balance due which they are paying off on an installment agreement will increase. Would I at least be able to beat the increase in penalties by arguing that the employer was partially at fault?

[JohnH]

Here is the link to the Socialy Security Publication which discusses receiving SocSec benefits before full retirement age while still working. It has the exact wording which veritas referenced about midway through.

I'm not sure about this, but I THINK SocSec sends some sort of form to fill out if the early retiree exceeds the Annual Earnings Limit. I assume that form would have a place to deduct sick leave and vacation pay from the amounts reported on the W-2 forms. I'm sure a qick call to SSA would clarify that point.

But the bigger issue is whether the taxpayer should even be concerned about repayment of the benefits. I tell people who begin drawing early benefits (usually against my advice), that if their circumstances change and they find their earnings will exceed the annual limit, they should go ahead and earn the extra income & let the benefits repayment take place. The SSA web site states that once they reach full retirement age the repayment will be factored into their future payments. So they really don't lose anything (in spite of all the nonsense that is spouted about it being a "50% tax rate, etc) and thus they are still ahead financially. SSA benefits are actuarily neutral, and this includes the repayment of benefits for early retirees. For the SSA benefits, in the long run it's a zero sum game, but the outside earnings are real extra earnings.

One can construct esoteric situations in which there's a slight negative effect because part of the additional earnings cause more of the SSA benefit to be taxed. But when you actually run the numbers even this is minimal, because when one's earnings are in the sliding range, the tax effect in one year reverses itself in the repayment year. Plus, this is only a problem for about 3 of the 4 years between early retirement age and full retirement age (depending upon when the person's birthday falls).

So I'd probably counsel them to earn as many dollars as she can and stop trying to shave nickels and dimes off the margins.

[erchess]

ood Point John

but this client spends every time before it comes in and so any reduction in 2014 benefits is clearly unthinkable. They are friends or I would fire them as clients.

[JohnH]

Edwin: I understand the client's mindset - I've had a few of those myself. Maybe you could convince them that by foregoing work in order to avoid the repayment, they are spending THAT money anyhow. But your point is valid - probably can't get them to look beyond the next paycheck and thus they will pile one financial mistake on top of another.

[Burke]

TY for the post but where did you find it? Also for Veritas or anyone who has an opinion to offer, how do you apply it to a prior year when you have a W2 for the current year? Also if the money in question does get applied to last year their balance due which they are paying off on an installment agreement will increase. Would I at least be able to beat the increase in penalties by arguing that the employer was partially at fault?

Sorry for delay in replying; I have been out of town.

(1) As I said in my first reply, there is nothing she can do about the year in which her earned income is taxable. That is the year in which it is received, and the full amount is used on the 1040 to figure income tax and the % of taxable SSA for that year (in this case, 2013).

2) When SSA notifies her of a payback of any benefits because she earned more than the amt which is allowed, she can contact them regarding the applicative rule about it not being counted in the current year for reduction in her benefits. These are two different things. She will not be notified until after SSA has accessed 2013 W-2 and/or self-employment income records, so it will be in 2014. It used to be the TP had to send a check back. Nowadays, they just withhold future payments until the amount is adjusted.

(3) The employer is not at fault. He is reporting it exactly like it should be. Since the income will not be applied to a previous year except for calculation and adjustment of of the SS benefit received, there should be no penalties, as last year's return (2012) will not be affected.

[veritas]

I found

TY for the post but where did you find it? Also for Veritas or anyone who has an opinion to offer, how do you apply it to a prior year when you have a W2 for the current year? Also if the money in question does get applied to last year their balance due which they are paying off on an installment agreement will increase. Would I at least be able to beat the increase in penalties by arguing that the employer was partially at fault?

The information at ssa.gov

[veritas]

I read you first post

Sorry for delay in replying; I have been out of town.

(1) As I said in my first reply, there is nothing she can do about the year in which her earned income is taxable. That is the year in which it is received, and the full amount is used on the 1040 to figure income tax and the % of taxable SSA for that year (in this case, 2013).

2) When SSA notifies her of a payback of any benefits because she earned more than the amt which is allowed, she can contact them regarding the applicative rule about it not being counted in the current year for reduction in her benefits. These are two different things. She will not be notified until after SSA has accessed 2013 W-2 and/or self-employment income records, so it will be in 2014. It used to be the TP had to send a check back. Nowadays, they just withhold future payments until the amount is adjusted.

(3) The employer is not at fault. He is reporting it exactly like it should be. Since the income will not be applied to a previous year except for calculation and adjustment of of the SS benefit received, there should be no penalties, as last year's return (2012) will not be affected.

and I see you answered the question with clarity.