Welcome to our “Social Security Q&A” series. You ask a question about Social Security, and a guest expert answers it.
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Today’s question comes from Larry:
“My wife is retired with a pension making around $49,000 gross. She was born in 1955. I was born in 1959, and I am still working full time. We file taxes jointly at present. I make around $118,000 gross.
When she turns 66 and 3 months, should she file for Social Security at her full retirement age? We know we will be higher than the allowed income limit and be taxed on 85% of her Social Security income. I will not be retiring at least until my FRA of 66 and 10 months in 2026.
Does it make sense for her to apply for Social Security now? Her benefits at her FRA will be about $1,200. My FRA benefits should be about $2,600.”
Avoiding the tax ax
Larry, your question suggests that you are especially concerned about how income taxes might affect your Social Security claiming options. You certainly do not want to ignore taxes, but our experience suggests that other factors are much more relevant to the claiming decision in most instances.
There are two main ways that taxes might influence your decision. First, if you foresee significantly lower marginal tax rates (perhaps when you stop working), then delaying the claiming of benefits may make financial sense.
Secondly, a lower future income might reduce the share of Social Security benefits subject to taxation. The share of Social Security benefits subject to federal taxation ranges between 0% and 85%. This share depends on combined income, basically a modified version of adjusted gross income.
For a married couple filing jointly, Social Security benefits are tax-free up to about $32,000 in “combined income” (about $25,000 for singles). Beyond that threshold, the share of benefits taxed rises steadily, reaching 85% at about $52,000 in combined income for married couples (about $44,000 for singles).
Given your financial situation, it seems clear that you will see 85% of your Social Security benefits taxed by the IRS. For example, suppose your combined Social Security benefits are $30,000 and that you and your wife are in the 12% tax bracket. This means that $25,500 of your Social Security benefits are taxed at a 12% rate, for a tax burden of $3,060.
While taxes can play a role in determining your optimal claiming choice, we have found that other factors generally dominate. The key determinants in most cases are:
- Life expectancies
- Relative ages
- Relative benefit levels
In your case, our analysis suggests you should do the following if both you and your wife have normal life expectancies:
- Your wife should claim her benefits now.
- You should claim your benefits when you reach your FRA. (Or as early as age 65 if you stop working by that age.) Your wife will receive a small spousal supplement (about $100 a month) when you claim your benefits.
Note that longer life expectancies would lead to a recommendation of claiming later than suggested for the normal life expectancy case.
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I hold a doctorate in economics from the University of Wisconsin and taught economics at the University of Delaware for many years.
Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the SSA alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.
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