As a bargaining tool used to expedite the passage of the Bipartisan Budget Act of 2015, Congress tightened Social Security loopholes for married couples, which will close on April 29, 2016. Taxpayers born after January 1, 1954 will have no chance to take lastminute advantage of the departing rules.
The amount of Social Security benefits one can collect depends on one’s age relative to full retirement age (FRA), which is 66 for those born between 1943 and 1954 and 67 for those born in 1960 or later. (For those born 1955–1959, FRA increases by two months each year until age 67; i.e., 66 and two months for 1955s, 66 and four months for 1956s, and so on.) One can begin collecting Social Security benefits at three times: 1) from age 62 to FRA, but with benefits reduced 25% for those born 1943–1954, gradually increasing for those born 1955–1959, and 30% for those born 1960 and later; 2) at FRA, for 100% of benefits; or 3) at any age after FRA, for which the benefit will grow 8% for each year between age 66 and age 70.
Consider the following example: Mary Jane, born in 1950, is presently 66; according to her Social Security Retirement Benefits statement, her benefit at this age is $1,000 per month. If she had chosen to collect at 62, her monthly benefit would be 75% of this, or $750; similarly, her benefit will be $1,320 at age 70. If Mary Jane is married, she has two other options, file- and-suspend and restricted application, which will expire April 29, 2016. These two options cost Social Security large amounts of money, which the new law will eliminate.
Mary Jane’s husband is Ray. Ray’s FRA is 66, and together they want to strategize their maximum Social Security benefit payout. According to Ray’s Social Security Retirement Benefits Statement, he can receive $1,500 a month now or $1,980 a month at age 70. If Ray files a file-and-suspend application with the Social Security Administration before April 29, he will be recorded as making an application for benefits without actually collecting benefits. He can defer his benefit payments so that they grow at 8% a year until he decides to collect, up to age 70. This will allow Mary Jane to file for “spousal benefits,” which is 1/2 of the benefits Ray would collect at FRA, or $750. She sees that this is less than the $1,000 she would receive on her own. When she reaches age 70, however, she can switch back to her own benefits and collect $1,320 per month. In short, one spouse begins collecting immediately, while the other defers benefits for a time.
After April 29, 2016, retiring taxpayers can collect either on their own record or their spouse’s, but flipping back and forth will no longer be allowed.
The other option available for married couples is called the restricted application. In this case, both spouses collect immediately; one collects on his or her record, and the other collects on a spousal benefit, which at a later date is converted back to their recorded earnings. For example, Ray could file a restricted application with the IRS and receive his benefits at age 66, or $1,500; Mary Jane could then claim 1/2 of Ray’s benefit amount, $750. When she reaches age 70, she can switch back to her own record and receive benefits of $1,320.
After April 29, 2016, retiring taxpayers can collect either on their own record or their spouse’s, but the flipping back and forth will no longer be allowed. The choice depends on many individual personal and financial factors. Taxpayers who are close to retirement should contact the Social Security Administration for advice (800-3250778, https://www.ssa.gov/agency/contact/) or consider hiring a financial professional.