I by no means consider myself a ‘tax expert’, so I am writing this only after reviewing a large number of publications and articles written by experts on the subject, but as the end-of-the-year approaches I felt it was important to share (at least in summary fashion) what seems like a few major, but mostly, um-publicized changes to Social Security that have been enacted almost ‘out of the blue.’ Accordingly take this article with a ‘grain of salt’ and be sure to seek out the expertise of your local financial consultant, retirement expert or tax accountant for more information.
Probably from the end of November through the end of December each year, more tax and retirement planning takes place than at any other time of the year. Financial consultants, retirement experts and tax accountants find themselves inundated with ‘what if’ scenarios for current clients and new clients asking “how do I” type questions. Well this year will be no exception, and in fact recent events may well give rise to more ‘what if’ and ‘how to’ questions than ever before.
You see, under the guise of the recently enacted Bipartisan Budget Act sweeping changes to Social Security claiming rules for retirees were ‘snuck’ into place. A variety of changes impact restricted applications and voluntary suspension of benefits, and wouldn’t you know it, they being taking place almost immediately; hardly by the time the ink is dry on the legislation. By the way, I wonder if even all of the final rule making details of the Social Security Administration for implementation of the legal provisions will be in place before the deadlines have passed?
The new rules significantly influence how individuals who are younger than 62 on January 1, 2016 will be able to claim social security benefits in future years. You might say ‘the just reward for baby boomers who have paid into the system for the last 40+ years’ as they begin to approach their own retirement age.
The first change concerns what is called ‘Restricted Applications for Spousal Benefits.” Before the newly enacted changes, any individual who was eligible for both a spousal benefit based on the work record of a spouse and a retirement benefit based upon his/her own work could choose to elect only a spousal benefit at their Full Retirement Age, thus allowing his or her own benefit to continue to accumulate at the rate of 8% per year under something known as Delayed Retirement Credits. They then could at age 70, or any point subject to the election, switch to their own larger benefit. The new law phases out this option for anyone born prior to January 2, 1954.
As if that were not enough changes, the new law also impacts rules governing what has been known as “Voluntary Suspensions.” Currently a lower-earning spouse is eligible for spousal benefits only after the primary wage earning under whose record they are filing for has filed for benefits. Spousal benefits are not subject to the ‘Delayed Retirement Credits’, so delaying a spouse’s benefit past Full Retirement Age represents lost benefits without any compensatory increase in benefit values.
The solution under the current law (before this newest enactment) was for the higher wage earner of the couple to file for benefits and then immediately request those benefits be suspended, thus allowing the suspended benefits to grow by 8% per year. The new law causes any Voluntary Suspension to stop all benefits payable under the earning record of the person whose benefit is suspended, in other words the spouse will not be able to collect spousal benefits.
The new law also eliminates the ability to request a retroactive lump sum of benefits between the date of suspended benefits and the date of the request. Some financial experts estimate that these changes collectively may cost couples who no longer can make use of the provisions as much as $50,000 or more in overall Social Security payouts.
There are a variety of other changes that may impact you as well; so if you are 62 years of age on or before January 2, 2016 or, age 66 by April 30, 2016, you need to consult with a qualified retirement, financial or tax advisor to consider your options prior to the changes going into effect on May 1, 2016.