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Expert analysis using tax facts online.

Those who have reached the age at which they can begin collecting benefits may choose to do so for a variety of reasons, but it is often because they have not been advised that there may be reasons to delay taking benefits. After collecting benefits for a while, it is still possible to suspend collection of benefits until a later point in retirement through a technique called "file and suspend." The strategy can be useful in a variety of circumstances, including situations in which a taxpayer wishes to reduce income for tax purposes, or ensure a higher level of government benefits later in life.

Tax Facts Online can assist in explaining the potentially complicated tax treatment of these Social Security benefits. Tax Facts Online Question 442 explains that Social Security benefits are often--but not always--taxable. If a taxpayer's modified adjusted gross income plus half of their annual Social Security benefits exceed a certain base amount, then the benefits may have to be included in gross income. Question 442 provides the base amount rates, which are $32,000 for a married couple filing jointly and $25,000 for individuals.

Many taxpayers may wish to suspend benefits because they believe they will be able to avoid paying taxes on these benefits if they are received later in life, when the taxpayer may be in a lower income tax bracket.

For a taxpayer who has yet to begin collecting benefits, file and suspend is very simple. Once the taxpayer reaches full retirement age, he or she simply files for benefits and then makes another filing to suspend these benefits. During the time that the benefits are suspended, the taxpayer earns delayed retirement credits, which increase his or her eventual benefit level by 8 percent for each year in which the benefits continue to be suspended. The taxpayer must begin to collect benefits by age seventy, by which point he or she can have increased the benefit level substantially.

Those who have taken benefits early, such as David Walters, will receive a reduced benefit that is based upon the number of years that he or she collects benefits before reaching full retirement age. However, David is still eligible to take advantage of the file and suspend strategy. Now that David has reached full retirement age (sixty-six in his case), he can suspend his benefits and begin to earn delayed retirement credits. In his case, the 8 percent per year will simply be added to the lower level at which his benefits began due to his early start.

Though David's benefits will increase by 8 percent each year, Ellen's spousal benefits will remain the same. She is currently receiving 35 percent of David's benefits because they began collecting benefits early (had they waited until full retirement age, Ellen would be entitled to 50 percent of David's benefits). Using the file and suspend strategy won't change this, because spousal benefits do not include any delayed retirement credits that David can earn through suspending his benefits.

Despite this, Ellen is entitled to continue collecting her 35 percent spousal benefit even while David has suspended his benefits. This way, he can earn delayed retirement credits while the couple continues to collect a portion of their Social Security benefits. This approach is often useful in situations where couples disagree as to when they would like to begin receiving benefits. If David had wanted to wait, but Ellen disagreed, he could use file and suspend so that she could collect her spousal benefits while he allowed his benefits to grow.
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Publication:Tax Facts Intelligence
Date:Sep 1, 2012
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