Gross Income and Exclusions

New!  Luchini - Week 2

Mark as Read  Reply

Good Evening Class,

I found this weeks forum pretty straight forward but very useful as this is what all people and couples eventually have to deal with once they hit 66 and start to think about retirement and collecting social security. It is a real life dilemma that some couples have and there are many different avenues and routes that couples can explore to try and find the best solution to the proposed prompt. In my opinion, I would not divorce my wife just to save on social security. Below is my response to this weeks prompt:

As a couple heads towards retirement, they must decide which tax system would most benefit them. There are certain pros and cons to each system and different tax breaks for each system. There is filing single, married, and married filed separately. The text goes into depth about each of these systems and the positives and negatives to each of them. However, you also need to be aware of the benefits given you you once you do turn 66 and retire. In the case of Sam and Sue, they need to consider the social security benefits they will be getting before filing a certain way. Upon turning 66, both Sam and Sue can start collecting Social Security benefits. While this is a great government run feature geared toward helping our senior citizens, there are also implications that affect social security and how it is received. However, when this happens, there are different taxation levels that need to be addressed. If their total income is less than $25,000, nothing is taxed as their are no benefits. As you move up the tier and make between $25,000-$34,000, nearly 50% of benefits received are taxable. Moving on from there, if the couple makes more than $34,000, 85% are taxable. A second option is the married filing jointly option. In this case, below $32,000 is not taxable, tier two is between $32,000 and $44,000 and the third tier is over $44,000. Because of these different options, it is important that the couple understands the repercussions of each tax system and how it affects them. In the case of Sam and Sue, and according to rules of social security, Sam will earn around $22,000 in social security benefits for the year ($1,800 x 12 = $21,600). For Sue, filing single will yield a similar result but in a higher tier. Because of this, the couple needs to focus on a plan that will help them in the long run rather than simply filing for divorce to try to salvage social security benefits. 

Spilker, B.C., Ayers, B.C., Outslay, E, Weaver, C. D., Barrick, J. A., Robinson, J. R., &  

              Worsham, R. (2015). Taxation of individuals and business  entities. New York, NY:        

               McGraw Hill Education.

New!  Re: Luchini - Week 2 

Mark as Read  Reply

Brian - 

Thanks for responding.  Here is something you should read:

There’s been a lot of buzz about the new  tax bill  and with good reason—the  Tax Cuts and Jobs Act  made a lot of changes to the existing tax code. Most of them begin in 2018 and they’re a lot to get your mind around. If you’ve historically chosen to itemize rather than take the standard deduction, here's what you need to know in the years going forward. 

New!  Week 2/ Gross Income and Exclusions

Jessica Arp(Oct 10, 2018 7:46 PM)- Read by: 3

Mark as Read  Reply

     In the case of Sam and Sue being married and signing up for social security, their best tax planning strategy would be to stay married and pay the taxes on social security.  According to Spilker, “When couples legally separate or divorce, one spouse may be required to provide financial support to the other in the form of alimony” (pg. 5-15).  Alimony for tax purposes are defined by the following: when cash is transferred under a separation agreement or divorce decree, the divorce decree or separation does not have a designation of payment other than alimony, when the spouses do not live together before the payment is made, and lastly when the payments cannot continue after death.  Alimony would be considered in the gross income of the spouse receiving it and would be deducted from the adjusted gross income for the spouse paying the alimony.  Another problem that could arise with alimony is instead of transferring ownership of an asset, to the recipient, the payer could claim alimony deduction by making a transfer that meets the definition of alimony requirements.

      Social Security benefits used to be excluded from income when paying taxes.  Taxpayers now may be required to pay up to 85 percent of the benefits in gross income.  This all depends on the amount that the taxpayer is claiming for the filing status.  The breakdown for taxpayers filing married joint when including social security benefits would be as followed: “If modified AGI + 50 percent of social security benefits is less than or equal to $32,000, Social Security benefits are not taxable.  If modified AGI + 50 percent of Social Security benefits is greater than $44,000, taxable Social Security benefits are the lesser of (a) 85 percent of Social Security benefits or (b) 85 percent of (modified AGI + 50 percent of Social Security benefits - $44,000), plus the lesser of (1) $6000 or (2) 50 percent of Social Security benefits” (Spilker, pg. 5-18). 

     The explanation of both alimony and social security benefits would put either Sam or Sue at a disadvantage if they decided to separate or divorce before the end of the tax filing year.  Since Sam makes $80,000 at his full time job and Sue makes $85,000 at hers, both would be taxed at the higher rate for Social Security benefits.  It would make more sense for Sue and Sam to stay married and claim over $165,000 for their gross income and just pay the max taxes on the Social Security benefits.  By staying married and filing jointly, Sam and Sue would only be taxed once.  If they separated or divorced, then both Sam and Sue would be taxed once for alimony payments given or received and again for Social Security benefits.

References:

Spilker, B. (2015). Taxation of Individuals and Business Entities Edition 6e. McGraw-Hill, Inc.

Re: Week 2/ Gross Income and Exclusions 

William Whitley(Oct 11, 2018 9:23 AM)- Read by: 4

 Reply

Also, if they separate prior to filing and file married filing separately, things could be bad also.  If one itemized deductions, the other one also has to itemize and that could be a problem for the one that doesn't get enough itemized deductions.