Social Security Reduction

[Golden Rocket]

I hate it when clients ask me about Social Security. It is enough to have to keep up with the IRS, let alone the SSA. But we need to know a modicum of information to service these situations. I'll bet all of you have clients who ask YOU instead of calling Social Security people.

At any rate, I have an elderly client who sold $250,000 worth of Florida property capital gains in 2006, and we filed accordingly. In the ten years prior to 2006, this taxpayer barely had enough AGI to meet filing requirements.

He has a letter from Social Security, showing where they are going to cut his 2008 benefits because he "makes so much money."

Is this for real? Do any of you have experience with this??

[S T]

SSA Benefits

Your post does not include your taxpayer's age, however, it is my understanding if the taxpayer is over the age of 65 ( or 66,67) depending on the retirement age , they can make as much money as they want from wages or net self employment income.

Then further, other income such as rental income, retirement income, capital gains, will not enter into the equation of their monthly social security benefits. Their monthly benefits should not be reduced at all. Here is a link to SSA and what counts as income to reduce the benefits http://www.ssa.gov/pubs/10069.html Look under the section "What Income Counts" specifically states that pension, interest, capital gains do not count.

Their benefits on an annual basis of the SSA 1099 form is subject to some percentage of income tax on form 1040, but SSA should not reduce their benefits, as long as the taxpayer has no taxable wage income.

Consider the taxpayer being under age of full retirement 65 -67, having earned W-2 wages over the limit, or maybe self employed? Could the taxpayer have received some delayed payout on deferred comp which is being reported as wages on a W-2 form rather than a 1099R form. . That could trigger the reduction in benefit. We had a lot of those about 10 years ago. Could one of them be receiving another retirement benefit that integrates with SSA., right now I can't think of another scenario that would trigger

Keep us posted as to your findings



Sandy

[ED SMITH]

There is a social security earnings test IF you are under the normal retirment age of 67.
If you are over that age you can earn as much as you want without having your SS cut.

http://www.ssa.gov/OACT/COLA/rtea.html

[DonPriebe]

And the answer is YES (sort of)

A retired taxpayer who had a big capital gains in 2006 WILL get a reduced SS check in 2008. Not because his Social Security payment is reduced, but because his Medicare premium is increased. But it's not forever.

The SSA website actually has a pretty clear FAQ page on this. See http://ssa.gov/pubs/10116.html#determine

[Zee]

A retired taxpayer who had a big capital gains in 2006 WILL get a reduced SS check in 2008. Not because his Social Security payment is reduced, but because his Medicare premium is increased. But it's not forever.

The SSA website actually has a pretty clear FAQ page on this. See http://ssa.gov/pubs/10116.html#determine

Great answer! I wouldn't have thought of that. SS is kinda screwed-up in their calculations of reductions, etc. I had a client receive a reduction letter last year that was still subject to the earnings limitations, but was over the limit because of one W2. However, he also had two minor Schedule C's with a combined net loss. So, adding the loss he was under the earnings limit. The SS Admin didn't even look at the losses. To correct the problem, it took a personal visit and extensive conversations. The SS conceded the error (after much discussion), and indicated the problem occurred because only W2's are looked at initially when the automated letters are generated because the Schedule C entries aren't even entered as input into the system until 24 months or so later. At least this is what we were told (I went with the client to help him). If they actually don't look at Schedule C income, there could be lots of folks collecting full benefits that should have been reduced.

[Larmil]

Remember

Great answer! I wouldn't have thought of that. SS is kinda screwed-up in their calculations of reductions, etc. I had a client receive a reduction letter last year that was still subject to the earnings limitations, but was over the limit because of one W2. However, he also had two minor Schedule C's with a combined net loss. So, adding the loss he was under the earnings limit. The SS Admin didn't even look at the losses. To correct the problem, it took a personal visit and extensive conversations. The SS conceded the error (after much discussion), and indicated the problem occurred because only W2's are looked at initially when the automated letters are generated because the Schedule C entries aren't even entered as input into the system until 24 months or so later. At least this is what we were told (I went with the client to help him). If they actually don't look at Schedule C income, there could be lots of folks collecting full benefits that should have been reduced.

the original W-2 is sent to SSA. The original Sched. C is sent to the IRS, sometimes many months later.

[Zee]

the original W-2 is sent to SSA. The original Sched. C is sent to the IRS, sometimes many months later.

So...what do you think, does SSA do an adjustment (in this case a second) when the review the Schedule C's or do they simply rely on the W2 information only? I suspect the latter since I had to talk to several levels of SSA Reps at their office before they understood you had to add the two Schedule C's together. Also, they seemed to think that the spouse's earned income (which was substantial) also counted...I guess they can't read their own rules. Oh...another frustration. When I called to ask how to correct the situation, I was told I had to make an appointment. So, I said "make me an appointment" and they assigned a time & date. When we arrived, for our "appointment", we were asked if we made an appointment to meet with a representative. I said, "I thought that's what we did". The answer? "No, the first appointment is just to come in you need a second appointment to meet with someone." It was almost laughable, but very frustrating. We did get in to meet with the Manager after I complained about their communication problems. LOL. The moral? SSA can be very difficult to deal with. I was warned, but my previous contacts have been ok.

[OtisMozzetti]

...
At any rate, I have an elderly client who sold $250,000 worth of Florida property capital gains in 2006, and we filed accordingly. In the ten years prior to 2006, this taxpayer barely had enough AGI to meet filing requirements.

He has a letter from Social Security, showing where they are going to cut his 2008 benefits because he "makes so much money."

Is this for real? Do any of you have experience with this??

Golden Rocket, this definitely seems to be the IRMAA, the "Income Related Medicare Amount Adjustment". I learned about that when I downloaded the Social Security Handbook at www.ssa.gov. It is an increase in Medicare Part B premiums which is put on those whose MAGI (including tax-exempt income) two years prior exceeded certain thresholds. For MFJ, those thresholds are $160,000, $200,000, $300,000, and $400,000; for single the thresholds appear to be half as high. Over a period of three years, the amounts by which this adjustment in the amount of Medicare premiums increase will itself become more; in other words the program is being itself "phased in". There is a possibility that Social Security receipients can appeal to Social Security that "a life-changing event" has occurred so that maybe the increase in Medicare premiums will be cancelled or reduced.

From a tax planning standpoint, those who might later be affected by these premium increases should keep their income below the cutoff points (thresholds). Another approach would be to realize all of one's capital gains within a single year, since it appears to me that the increase in Medicare premiums is re-determined each year based upon MAGI on the tax return two years earlier.

The Tax Book makes reference to this Medicare adjustment in two places but it refers users to the Deluxe edition or to the Small Business edition.

[Larmil]

My Guess

So...what do you think, does SSA do an adjustment (in this case a second) when the review the Schedule C's or do they simply rely on the W2 information only? I suspect the latter since I had to talk to several levels of SSA Reps at their office before they understood you had to add the two Schedule C's together. Also, they seemed to think that the spouse's earned income (which was substantial) also counted...I guess they can't read their own rules. Oh...another frustration. When I called to ask how to correct the situation, I was told I had to make an appointment. So, I said "make me an appointment" and they assigned a time & date. When we arrived, for our "appointment", we were asked if we made an appointment to meet with a representative. I said, "I thought that's what we did". The answer? "No, the first appointment is just to come in you need a second appointment to meet with someone." It was almost laughable, but very frustrating. We did get in to meet with the Manager after I complained about their communication problems. LOL. The moral? SSA can be very difficult to deal with. I was warned, but my previous contacts have been ok.

is that if their is no history of SE income that the second adjustment might be missed. They know whether past income is W-2 or SE. I would rather deal with the IRS than the SSA any day.