Tax Researcher Volume XXIX Issue 6 June 2012

file for benefits at ages 62, 63 or 64 will receive FIVE KEY ISSUES IN a reduced benefit. For example, workers who retired at RETIREMENT PLANNING exactly age 62 in 1999 received only 80.0% of the amount they would have received had they waited until normal For most workers, “retirement” is the time when they apply retirement age (65 years, at that time) — and the benefit for regular, monthly Social Security retirement benefit amount stayed at that reduced level even after they reached payments. How does one’s age at “retirement” affect the their applicable normal retirement age. benefit amount the “retiree” is entitled to receive? However, for workers born in 1938 or later, who are subject ISSUE #1: What is “Normal” Retirement Age? to the advancing “normal” retirement age noted above, Until the end of 1999, the “normal” age to begin receiving benefits will be reduced even more if they retire early. When Social Security retirement benefits was 65. That was the the phase-in to a “normal” retirement age of 67 is complete, retirement age at which a worker would be entitled to as referred to above, workers may still retire early at age 62, receive his or her full benefit. However, in January, 2000, but they will receive only 70% of their full benefit. the Social Security Administration began the long-planned phase-in of a higher “normal” retirement age. The age ISSUE #3: With Repeal of the Retirement Earnings Test, increase is to be accomplished gradually, over a 22-year Should the “Retiree” Consider Re-? period. As the following table shows, younger workers will Suppose a worker “retires” at full retirement age and begins have to work longer for full benefits. receiving Social Security retirement benefits, but then starts working at another (part- or full-time). Before year PHASE-IN FOR 2000, that could have caused a reduction in the worker’s INCREASED “NORMAL” RETIREMENT AGE retirement benefits. Workers born in Can retire with full benefits at Specifically, working seniors between the ages of 65 and 69 1937 and earlier 65 years lost $1 of benefits for every $3 of earnings above a particular 1938 65 years, 2 months earnings limit. For example, the earnings limit for year 2000 1939 65 years, 4 months had been pegged at $17,000. (There never was an earnings 1940 65 years, 6 months test for retirees age 70 and over). 1941 65 years, 8 months 1942 65 years, 10 months All of this changed on April 7, 2000, when the President 1943 to 1954 66 years signed into law a bill which ELIMINATED the Social Security 1955 66 years, 2 months earnings test for working seniors between the ages of 65 1956 66 years, 4 months and 69, retroactive to January 1, 2000. 1957 66 years, 6 months 1958 66 years, 8 months As noted earlier, workers may retire “early” between 1959 66 years, 10 months the ages of 62 and their applicable full retirement age. 1960 and later 67 years Importantly, however, the earnings test remains for those who retire “early.” Importantly, the foregoing change in “normal” retirement age affects only Social Security retirement benefits, not A related point to remember is that employees, who return to eligibility for Medicare benefits, which begins at age 65. the workforce after they have begun collecting Social Security benefits, will be subject to withholding for Social Security and ISSUE #2: Are Benefits Reduced for “Early” Retirement? Medicare taxes on their , just like all other employees. Workers cannot receive any Social Security retirement Withholding of tax is not suspended just because they are benefits until they reach age 62. However, workers who receiving Social Security benefits. Tax Researcher

ISSUE #4: What Can Be Gained By Delaying “Retirement”? also would be annual cost-of-living adjustments applied to Individual benefit amounts vary depending on the worker’s the benefits paid in those and future years. lifetime earnings covered by Social Security. As noted earlier, if a worker decides to retire early, those benefits will ISSUE #5: Social Security Retirement Benefits Are Taxable be reduced by a specific amount. However, the opposite is For Some Retirees also true. By delaying retirement, an individual will receive a When a Social Security recipient has income in addition to his higher benefit amount than if he or she had retired at age 65 or her Social Security benefits, the benefits may be subject (or the applicable “normal” retirement age). to . The higher an individual’s other income, the higher the tax on the Social Security benefits. Under Social Security rules, an individual’s benefit is increased by a certain percentage each year that he or The precise amount of taxable Social Security benefits she delays ending work and claiming benefits. The credit depends on the amount of the retiree’s other income and the gradually increases (based on the individual’s date of birth) amount of his or her benefits. For these purposes “other to a rate of 8% per extra year worked for the youngest income” is adjusted gross income (wages, , dividends employees who take later retirement. There is no boost in and taxable interest, minus IRA contributions) plus tax- benefits for years worked past age 70. exempt interest. The income tax calculation is progressive. Some workers may not have to pay income tax on any of their ANNUAL CREDIT FOR DELAYED RETIREMENT benefits, and no one has to pay tax on all of his or her benefits. Workers born in Can receive a boost in benefits of This potential income tax liability should be anticipated by 1933-1934 5.5% retirees, who may request withholding on benefits using Form 1935-1936 6.0% W-4V for the Social Security Administration, or make their 1937-1938 6.5% own quarterly estimated tax deposits. 1939-1940 7.0% 1941-1942 7.5% IDAHO CHANGES 2012 1943 and later 8.0% WITHHOLDING For example, Employee A was born in 1937, so he could have retired at age 65 in 2002 and collected his full benefit. Due to legislation enacted on 4/5/12, Idaho is making changes Based on their earnings record, their monthly Social to their withholding tables retroactive to 1/1/12. The highest Security benefit at age 65 was $1,200. Looking at the table withholding tax rate is reduced from 7.8% to 7.4%. The 7.4% above, we see that Employee A’s annual credit for delaying rate also applies to supplemental withholding. In retirement is 6.5%. So, if they had waited until the following addition, the annual allowance amount increases from $3,700 year to retire, the monthly benefit would have increased to $3,800. The new withholding tables take the retroactive to $1,278. If they waited until age 70 to retire, the monthly changes into account so no adjustments need to be made to benefit would be increased to $1,590 per month. And, there prior withholding.

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12-MONTH INDEX (July 2011 through June 2012) TOPIC MONTHLY ISSUE

Auto Mileage Rates (IRS) effective July 1, 2011...... Aug-11 effective January 1, 2012...... Jan-12

“Catch-Up” Contributions (SEE Pension Plan Contribution Limits) Connecticut Revises 2011 Withholding Effective 8/1/11...... July-11

Deferred Compensation Plans (SEE Pension Plan Contribution Limits) De Minimus Fringe Benefits...... Nov-11

Employee vs. Independent Contractor...... Sept-11

Federal Annual Amounts and Limits...... Dec-11 Federal Mileage Rates (SEE Auto Mileage Rates (IRS)) Federal Tax (FUTA) Surtax Expired 6/30/11...... Aug-11

Garnishment Orders...... Nov-11

Household Employees...... Mar-12

Idaho Changes 2012 Withholding...... June-12 Illinois Legalizes Civil Unions...... July-11 Independent Contractor vs. Employee...... Sept-11 IRS Citations...... May-12

Medicare Taxable Wages...... Nov-11 Michigan Scheduled 10/1/11 Tax Rate Decrease Delayed…………………...... July-11 Rate Changes (including maximum tip credit, if applicable) Arizona—effective 1/1/12...... Dec-11 Colorado—effective 1/1/12...... Jan-11 Florida—effective 1/1/12………………………………………………...... Dec-11 Montana—effective 1/1/12...... Dec-11 Ohio—effective 1/1/12...... Dec-11 Oregon—effective 1/1/12...... Dec-11 Vermont—effective 1/1/12...... Dec-11 Washington—effective 1/1/12...... Dec-11

New York Metropolitan Commuter Transportation Mobility Tax, Changes to...... Apr-12 New York State & Yonkers Withholding Tax Rate Changes Effective 1/1/12...... Feb-12 New York Marriage Equality Act Effective 7/24/11…………………………...... Sept-11 North Dakota Revises 2011 Withholding Tables...... July-11

Pension Plan Contribution Limits 2011 and 2012...... Dec-11 Philadelphia Scheduled Wage Tax Rate Decreases Eliminated Effective 7/1/11...... Aug-11

Recordkeeping, Employer Requirements...... July-11 Recordkeeping For Employment Taxes and Information Reporting...... Aug-11 Retirement Planning, Five Key Issues In...... June-12

Social Security, Employee Tax Rate Decrease Eff. 1/1/12 to 2/29/12...... Feb-12 Social Security, Employee Tax Rate Decrease Extended Through 12/31/12...... Mar-12 Social Security Taxable Wages...... Dec-11 State Disability Insurance...... Feb-12 State Unemployment Insurance Florida Unemployment Taxable Wage Base Decrease 1/1/12…………...... May-12 Taxable wage limits table for 2011 and 2012……………………………...... Jan-12 ...... Oct-11 SUI (SEE State Unemployment Insurance)

Tip Credits (SEE Rate Changes)