Don't Let Your Tax Clients Miss This Social Security Benefit
Although Social Security benefits and the claiming strategies surrounding them are only tangentially related to tax preparation and planning, CPAs and tax preparers owe it to their clients to make them aware of the critical changes that are taking place within Social Security.
The Bipartisan Budget Act of 2015 made significant changes to some of the rules surrounding Social Security benefits, causing many lucrative claiming strategies to be phased out over time. The rapidly approaching elimination of the popular “File and Suspend” strategy is of particular importance this tax season.
For benefits suspended after April 29, 2016, a spouse will no longer be eligible to receive spousal benefits based on a suspended benefit. This rule change could cause a married couple to lose out on as much as $64,000 of benefits over the course of four years if timely action is not taken. Impacted households must file and suspend benefits before April 29 to be grandfathered under the prior rules.
“File and Suspend” currently works by utilizing two elements of the Social Security benefits calculation. The “File” element, where a retiree requests his/her own benefit, also entitles a spouse to collect a spousal benefit equal to one half of the other spouse’s benefit. The "Suspend" element allows the retiree to immediately suspend that benefit and garner 8 percent annual benefit increases from age 66 to 70 for a total increase of 32 percent.
Under the existing rules, suspending the primary benefit does not impact the spousal benefit. After April 29, suspending a retirement benefit will also stop all related spousal and/or dependent benefits. The "File and Suspend" strategy can benefit both dual-earning and single-earning married couples. Below you find two examples:
If both spouses are 66 and have their own retirement benefits (as much as $2,663 per month), the higher-earning spouse can file and suspend, entitling the lower-earning spouse to spousal benefits while benefiting from the 8 percent annual increase during the suspension. The lower-earning spouse can request to receive only his/her spousal benefits and also garner the 8 percent annual increases in his/her own retirement benefits.
At age 70, they would each begin taking their own retirement benefits and enjoy the 32 percent total increase in benefits. If a suspension does not take place prior to April 29, the spousal benefits from age 66 to 70 claimed by the lower-earning spouse will no longer be available, costing this couple as much as $63,912 in lost spousal benefits.
A similar situation holds true for a married couple with a single-earner. The spouse with the retirement benefit can file and suspend at age 66, enabling their spouse to collect spousal benefits while allowing the primary retirement benefit to grow by 32 percent at age 70. If the suspension does not take place prior to April 29, the spousal benefit will not be paid based on the suspended benefit, and up to four years of spousal benefits could again be lost.
Determining whether a married couple is eligible to file and suspend prior to the cutoff date involves a number of calculations, so we have created the simple chart below to help identify households at risk of losing potential benefits. We encourage you to keep this chart nearby this tax season and alert your clients to the potential loss of benefits they may experience if action is not taken soon.
Justin D. Smith, CFA, CFP® is a Partner and Portfolio Manager with Slayton Lewis, a retirement-focused wealth management firm offering holistic advice for the baby boomer generation. He and William S. Campbell, CFP®, MBA are authors of the upcoming book "Boomer-Bust: How to Retire Without...