Are your Social Security strategies up to date?

Believe it or not, a bipartisan federal budget deal might affect your retirement planning strategies.

The Bipartisan Budget Act of 2015, signed into law last November, eliminated two Social Security claiming strategies that have been used by many people to maximize their benefits. Depending on your age, though, you might still be able to use these strategies.

The file-and-suspend strategy

The first strategy, known as file-and-suspend, has been used mainly by married couples, especially if one spouse has earned substantially more than the other. Upon reaching full retirement age, the higher-earning spouse files for Social Security benefits and then suspends receipt of the benefits until later — usually, until age 70.

As a result, this spouse will receive delayed retirement credits totaling 8% per year, or 32% if he or she waits until age 70 to receive benefits. In addition, the lower-earning spouse can receive spousal benefits based on the higher-earning spouse’s earnings record if they are more than his or her own benefits. In general, these benefits are equal to 50% of the higher-earning spouse’s full retirement amount, assuming the higher-earning spouse has reached full retirement age.

The budget act makes a subtle but crucial change to this rule: Married individuals can no longer receive a benefit based on their spouse’s earnings unless the spouse is actually receiving those benefits. This effectively eliminates the file-and-suspend strategy.

Fortunately, the law contains a provision that grandfathers in anyone who is currently using file-and-suspend. You also can use file-and-suspend if you will reach age 66 before May 1, 2016, and file to claim benefits by this date.

The restricted application strategy

The second Social Security claiming strategy affected by the budget act is known as “restricted application.” Here, a spouse reaching full retirement age who is eligible for both retirement and spousal benefits files a restricted application for spousal benefits only. At this time, the spouse delays applying for his or her own benefits, but can switch and start receiving these benefits later.

Using this strategy, a higher-earning spouse can claim 50% spousal benefits upon reaching full retirement age instead of taking his or her own benefits, thus enabling these benefits to continue to grow. The lower-earning spouse doesn’t have to have reached full retirement age.

When the higher-earning spouse starts receiving his or her own benefits, the lower-earning spouse can switch to a spousal benefit based on the higher earner’s benefits at full retirement age. Using this strategy, some married couples have been able to increase their Social Security benefits by tens of thousands of dollars.

The budget act is phasing out the use of the restricted application strategy. If you’ll turn 66 before May 1, 2016, you can file a restricted application anytime between ages 66 and 70. If you turned 62 before the end of 2015, you can file a restricted application for spousal benefits when you turn 66 so long as your spouse — or, if you’re unmarried and meet certain other criteria, your ex-spouse — is at least 62.

A fresh look

These changes make it critical to take a fresh look at your Social Security claiming strategies, especially if you fall within the age ranges outlined here. Contact your financial advisor to discuss your situation in more detail.

© 2016

Tax Extenders Bill Approved by the Senate

by Sarah Hubber

Tax Department at Atchley & Associates, LLP

Congress finally made their list, and you should check it twice.

With just two weeks left in the year, the Senate has passed the tax extenders bill, which retroactively extends some tax breaks through the end of 2014, and lets other remain expired. President Obama is expected to sign this bill into law this week.

The provisions that were renewed had originally expired at a the end of 2013, and pertain to many individuals and businesses. Tax breaks like bonus depreciation, increased section 179 expensing limits, and the tuition expense deduction have been renewed through the end of this year, among others. Essentially, most of the tax incentives that were available for the 2013 tax year will now be available for 2014. The criteria for qualifying for these deductions and credits are the same as those for tax year 2013.

Below are some of the provisions that have been extended, as listed on the US Senate website.

Individual Tax Extenders – Renewed through 2014
  • the tax deduction of state and local general sales taxes in lieu of state and local income taxes
  • the tax deduction of qualified tuition and related expenses
  • the tax deduction of expenses of elementary and secondary school teachers
  • the tax deduction of mortgage insurance premiums
  • the tax exemption of distributions from individual retirement accounts for charitable purposes
  • the tax exclusion of imputed income from the discharge of indebtedness for a principal residence
Business Tax Extenders – Renewed through 2014
  • the increased Section 179 expensing allowance ($500,000) for business assets, computer software, and qualified real property (i.e., leasehold improvement, restaurant, and retail improvement property)
  • accelerated depreciation of certain business property (bonus 50% depreciation)
  • the tax credit for increasing research activities
  • the work opportunity tax credit
  • accelerated depreciation of qualified leasehold improvement, restaurant, and retail improvement property, of motorsports entertainment complexes, and of business property on Indian reservations
  • the new markets tax credit
  • tax incentives for investment in empowerment zones
  • the 100% exclusion from gross income of gain from the sale of small business stock
  • the basis adjustment rule for stock of an S corporation making charitable contributions of property
  • the reduction of the recognition period for the built-in gains of S corporations
  • the tax credit differential wage payments to employees who are active duty members of the Uniformed services
  • the special rule allowing tax deduction for charitable contributions of food inventory by taxpayers other than C corporations
  • the low-income housing tax credit rate for newly constructed non-federally subsidized buildings
  • tax rules relating to payments between related foreign corporations and dividends of regulated investment companies
  • the treatment of regulated investment companies as qualified investment entities for purposes of the Foreign Investment in Real Property Tax Act (FIRPTA)
  • the subpart F income exemption for income derived in the active conduct of a banking, financing, or insurance business
  • the tax rule exempting dividends, interest, rents, and royalties received or accrued from certain controlled foreign corporations by a related entity from treatment as foreign holding company income
Energy Tax Extenders – Renewed through 2014
  • the tax credit for residential energy efficiency improvements
  • the tax credit for energy efficient new homes
  • the tax deduction for energy efficient commercial buildings
  • the tax credit for second generation biofuel production
  • the income and excise tax credits for biodiesel and renewable diesel fuel mixtures
  • the tax credit for producing electricity using wind, biomass, geothermal, landfill gas, trash, hydropower, and marine and hydrokinetic renewable energy facilities
  • the special depreciation allowance for second generation biofuel plant property
  • tax deferral rules for sales or dispositions of qualified electric utilities

If you have questions or need advice, please don’t hesitate to contact any of the tax professionals at Atchley & Associates using the contact information below. We would be happy to help.

Happy Holidays,

Sarah Hubber

(512) 346-2086