Popular Social Security ‘unintended loopholes’ closed

The Bipartisan Budget Act of 2015 institutes major changes to Social Security laws

This strategy-changing  “Closure of Unintended Loopholes” has forced many people to worry about the consequences of these changes to their tax planning and strategies. This particular law, with its end-of-year timing, has added a new dimension to our clients’ mid-year IRS tax reviews.

Mid-year IRS tax reviews are an important part of personal and business tax preparation in anticipation of tax filing. Continuous tax preparation is critical to the practice of tax avoidance, which I consider a true art form.

Social Security benefits, especially decisions about when and how to begin benefits, are traditionally subjects discussed during personal and business mid-year tax reviews. This year, however, because of late 2015 legislation passed by the U.S. Congress in an attempt to protect the solvency of the Social Security System, the subject is even more critical.

First and foremost, these new laws, as they stand at this point, will not impact individuals ages 70 or older and those who will turn 70 in 2016.

That being said, let’s look at some strategies, or ‘unintended loopholes’ which could have resulted in cumulatively higher benefits that have been eliminated:

Filing a restricted application

Prior to November 2015, an individual who had reached full retirement age had the option to claim benefits on their spouse’s earnings and later claim benefits based on their own earnings. The new law, which applies to individuals who were not age 62 before January 2, 2016, requires that individuals take the highest available benefit. Individuals ages 62 and over are ‘grandfathered’ into the old rules. How does this work with your previous tax planning?

File and suspend

Under the new law, individuals reaching full retirement age by April 30, 2016, and who took advantage of the old law by April 30, 2016, could still apply for benefits, suspend them, and earn delayed retirement credits for a higher benefit later. Under the new law, anyone who files and suspends benefits will also effectively suspend related claims by a spouse or children.  This time last year your tax strategy may have been based on the old Social Security laws. Now what?

Lump-sum reinstatement

With the end of the file and suspend tactic came the end of the associated retroactive lump-sum payment of the deferred benefits. Simply put, prior to the November 2015 law, if an individual filed for benefits at age 66 or above, then suspended payment, and two or three years later decided to start taking benefits, there would be a lump sum payment of the deferred benefits. Do you know how deferred payments from Social Security are taxed?

Bottom line

This is not 2015. A lot of things besides the IRS laws and Social Security Laws regarding benefits and taxation have changed. The IRS has over 80,000 employees, one in four considered agents or revenue officers. Your best tactic is to continually practice the fine art of tax avoidance. Call me 479-478-4831.  It’s time to get your mid-year tax review scheduled.