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Tax Tip of the Week | How Divorce Affects Social Security Benefits?? October 2, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

Social Security Benefits experts are difficult to find. I am not one. We understand the calculations of Social Security and Self Employment taxes along with some areas (and entity choices) in which they may be minimized. But, the nuances of Social Security Benefits do not fall directly into our world of income taxes, accounting and business consulting.

Social Security Benefits are complicated and a divorce increases this level of complexity.  Practically 50% of USA marriages end in divorces. The following article explains some of these rules and also walks us through an example of a divorced couple.

                                     -Mark Bradstreet

Here’s how a divorce can affect your Social Security situation.

A whopping 91% of Americans over the age of 50 don’t understand what factors determine the amount they can potentially receive in Social Security benefits, a survey from the Nationwide Retirement Institute found.

There are several factors that can affect how much you receive in Social Security benefits, such as the age at which you claim benefits, whether you continue working after you claim benefits, and how much you earned during the years you paid into Social Security.

One factor that’s easy to overlook, however, is divorce. If you are currently divorced and were married for at least 10 years, you or your ex-spouse could be earning more in Social Security benefits than you think.

How divorce affects Social Security

Not all divorced couples are eligible to receive additional benefits once they start claiming Social Security, and there are certain requirements you’ll have to meet.

The first thing to consider is how your benefits compare to your ex-spouse’s. If you’re receiving more in Social Security benefits than your ex-spouse (or if you haven’t claimed yet but are expected to receive more than your ex-spouse), you’re not eligible for any additional money each month. But if you’re receiving less each month than your ex, you may be eligible for an increase in benefits based on your ex-spouse’s work record.

Assuming you’re receiving less than your ex-spouse in benefits, there are a few other requirements you’ll need to meet. First, you and your former spouse need to have been married for at least 10 years, and you cannot currently be married (although it doesn’t matter whether your ex-spouse has remarried or not). In order to start claiming benefits, you also need to be at least 62 years old.

If you and your ex-spouse are old enough to file for benefits but your ex hasn’t claimed them yet, you can still claim your benefits based on their work record if you have been divorced for at least two years. Also, if you’re eligible for benefits based on your own work record, that money will be paid out first. Then if you’re also eligible to receive extra benefits based on your ex-spouse’s record, you’ll receive an additional amount each month.

Exactly how much extra you’ll receive depends on the age at which you claim. In order to receive the full amount you’re entitled to, you’ll have to wait until your full retirement age (FRA) – which is either age 66, 67, or somewhere in between. If you claim before then (as early as age 62), your benefits will be reduced. By waiting until your FRA, assuming you’re eligible to receive benefits based on your ex-spouse’s record, you can receive half of the amount he or she is receiving in benefits.

One last thing to keep in mind is that regardless of how much someone is receiving in benefits based on their ex-spouses record, it doesn’t affect how much the other person or their current spouse receives in benefits. So, if, say, your ex-wife is receiving benefits based on your record, you and your current wife’s benefits will not be reduced as a result.

Social Security in action: A hypothetical example

Figuring out whether you can claim benefits based on an ex-spouse’s record and calculating what you’d actually receive is complicated and confusing. So, let’s look at a hypothetical example to make it a little easier to understand.

Let’s say you and your husband were married 20 years, and you never remarried after the divorce. Your FRA is 67 years old, and if you claim at that age, you’d be receiving $1,000 per month based on your own work record and earnings. Your ex-husband, however, is currently receiving $2,500 per month in benefits. Because you were married at least 10 years, you’re unmarried now, and you’re eligible to receive less in benefits than your ex-spouse, you can apply for benefits based on your ex-husband’s record.

For simplicity’s sake, let’s say you wait until your FRA to claim. By doing so, you’ll receive the full $1,000 you’re entitled to based on your own record. Based on your ex-husband’s work record, you’re eligible to receive half of what he’s receiving, or $1,250 per month. With ex-spouse benefits, you’re not allowed to “double dip” – meaning you won’t receive your $1,000 plus $1,250 based on your ex-husband’s record. Rather, you’ll receive your $1,000 and an additional $250 per month so that your total benefit amount is equal to half of what your ex-spouse is receiving in benefits.

Also, all the normal Social Security restrictions still apply here. So, if, for example, you claim earlier than your FRA, your benefits will be reduced. And if you continue working after claiming benefits, you may see a (temporary) reduction in benefits as well, depending on how much you’re earning.

Social Security benefits can seem complex, and there are many factors that contribute to how much you’ll receive each month. But by understanding how much you’re entitled to and whether you’re eligible for additional benefits, you can maximize your monthly checks – and enjoy a more financially stable retirement.

Credit given to:  Katie Brockman, The Motley Fool This was published on July 1, 2019

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 454 | New Tax Law (TCJA) – How It Will Affect Alimony Payments April 4, 2018

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Tax Tip of the Week | April 4, 2018 | No. 454 | New Tax Law (TCJA) – How It Will Affect Alimony Payments

These new changes take effect for divorces and legal separations after 2018.

Prior law:  Under the current rules, an individual who pays alimony can deduct the alimony or separate maintenance payments paid during the years as an “above the line” deduction. An “above-the-line” deduction is a deduction that a taxpayer need not itemize to deduct. These deductions are more valuable than an itemized deduction.

And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse.

Please note that the rules for “child support”—remain unchanged. Payers of child support don’t receive a taxable deduction. Recipients of child support don’t pay tax on those amounts.

New law:  A tax deduction for alimony no longer exists for the payor. Also, alimony is no longer taxable income to the recipient. So, for divorces and legal separations that are executed after 2018, the alimony-paying spouse will no longer be able to deduct these payments and the alimony-receiving spouse doesn’t include the payments in gross income.

Note: TCJA rules are not applicable to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and that agreement is legally modified, then the new rules don’t apply to that modified decree, unless the new agreement expressly states that the TCJA rules are to apply. Situations may exist where applying the TCJA rules voluntarily is advantageous for the taxpayers.

If you wish to discuss the impact of these rules on your particular situation, please give us a call.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are very much appreciated. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.

This week’s author – Mark Bradstreet, CPA

–until next week.

Noncustodial Parents Beware | Tax Tip of the Week | No. 201 June 5, 2013

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We Have Been Urging This Form for Years….

In a divorce situation when the couple has minor children, it is common to see the divorce decree will allow one spouse to claim the children as dependents in even years and the other spouse in odd years.

Over time, unfortunately, the custodial spouse seems to “forget” this sometimes.  To protect the noncustodial spouse, the IRS requires a Form 8332 ( www.irs.gov/pub/irs-pdf/f8332.pdf) to be attached to the tax return.

A recent court case (Shenk, 140 TC No. 10) underlines the importance of properly using the Form 8332.  In this court case Mr. Shenk argued he was entitled to claim exemptions taken by his ex-wife.  The failure to have her sign an 8332 to release her claim to the exemption also cost him head-0f-household filing status and the ability to claim the child tax credit for the kids.  Since Mr. and Mrs. Shenk divorced prior to 2009, more liberal rules could have been applied to substantiate his filing.  He could have attached a signed copy of the separation agreement or divorce decree in lieu of Form 8332.

For divorces after 2008, the IRS will only accept a properly signed Form 8332 in cases where an ex-spouse improperly claims exemptions of minor children.  This case is one of several that the courts have maintained that this form is the only acceptable remedy.

We have been urging attorneys, and separating parents, for years to get this form signed at the time of the divorce when all the other paperwork is being executed.

As always, give us a call with any questions or concerns you may have.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.

Divorce and the Tax Consequences of Payments | Tax Tip of the Week | No. 98 June 22, 2011

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Understanding Applicable Tax Laws

Determining the tax consequences that can arise during a divorce or marital separation can be vital for the financial protection and well being of you and your family. That’s why it’s important to understand applicable tax laws before making any major decisions.

Often most confusing during the divorce process is determining whether a payment should be considered alimony or child support. Generally, alimony is the amount paid to a spouse for his or her living expenses, education, health or life insurance, property taxes, or mortgage payment. Alimony is not for providing child support. The person receiving alimony must pay taxes on the alimony in the year it is received, and the paying spouse may deduct the amount in the year it is paid, provided the alimony meets all of the following conditions:

• The payment is made in a cash form, which includes checks, bank deposits, etc. Payments in the form of such things as bonds, stocks, money market shares, or actual objects are not considered alimony for tax purposes.

• The payment is made as the result of a legal separation agreement or divorce decree.

• The spouses do not live in the same household at the time the payment is made.

• The divorce decree does not designate the payment as nontaxable to either party.

• There can be no liability for payments after the death of the receiving spouse.

Child support, unlike alimony, is not taxable to the spouse who received the payment, nor is it tax deductible by the spouse who makes the payment. A divorce decree may specifically call the payment “alimony,” but the payment may have the “characteristics” of child support. One characteristic of a child support payment might be the designation in the divorce document that the payment be terminated if the child’s situation changes.

Tax challenges during and following a divorce are common, but they can be minimized with some knowledge about tax laws and IRS procedures. Financial planning is an important part of the divorce process. This tax tip contains general tax information only.  Each tax situation may be different, do not rely upon this information as your sole source of authority.

As always……give us a call BEFORE you do something-not after!

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt – the guy behind TTW

…until next week.


Divorce and Claiming Dependents – Tax Tip of the Week March 24, 2010

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Tax Tip of the Week | Mar. 24, 2010 | No. 33
What you need to do

Many times a divorcee decree will grant the noncustodial parent the right to claim as dependents minor children in alternating years. For example, the custodial parent can claim the child(ren) in years ending with even numbers, and the noncustodial parent can take them as dependents in years ending with odd numbers.

New this year
The IRS now requires Form 8332 be attached to the return of the noncustodial parent in the years when claiming dependents. The IRS will no longer accept copies of divorcee decrees or any other documentation relating to the right to claim children as dependents.

Completing this form is very simple and only needs to be done one time. All that is needed is for the custodial parent to list the years they are releasing claims to exemptions all the way until the year the child turns 18. (Note—it would probably be a good idea to carry through to the age of 22 in the event the child remains a full-time college student.) Copies can then be made and attached to the noncustodial parent’s return in future years.

If the noncustodial parent is electronically filling his or her return, the Form 8332 must be attached to Form 8453 and mailed to the IRS.

The custodial parent does retain the right to revoke their written declaration in future years if facts and circumstances dictate. This would be accomplished by filing and attaching a new Form 8332 in the year of that election.

Editorial Note: I really wish divorcee attorneys would include the completion of this form as part of all the other divorce documents that are prepared and signed.

As always, give us a call if you have any questions. In Dayton, call 937-436-3133 and in Xenia, call 937-372-3504. Or visit http://www.bradstreetcpas.com.

Rick Prewitt – the guy behind TTW

…until next week.