Retirement Planning and Employee Benefits - Social Security

A Social Security number is a mandatory requirement for which of the following?

- getting a job - filing tax returns - receiving Social Security benefits Employers, financial institutions that pay interest and the Internal Revenue Service (IRS) require that an individual present his or her Social Security number. It is not possible to pay into the Social Security program and to collect Social Security benefits without a Social Security number. Many other businesses and government agencies also use the Social Security number for recordkeeping purposes.

What does Medicare Part A cover?

- hospital - inpatient hospital care

Tax that an individual pays towards Social Security goes into trust funds, from which Social security pays the costs of administering the Social Security programs. What are the costs?

- less than one cent for each tax dollar collected. Social Security pays the costs of administering the Social Security programs from the trust funds. Those costs are less than one cent of each Social Security tax dollar collected.

What does Medicare Part B cover?

- outpatient hospital care - outpatient doctor services - medical insurance

Steve retired at 55 and his only source of income is from his investment portfolio. Steve's portfolio produced $40,000 of interest and capital gains. How many credits of coverage did Steve earn toward Social Security.

0 Investment earnings are not subject to Social Security tax and do not receive credits.

What percentage of taxes goes towards Medicare?

1.45% Of the 7.65% taken from an employee's gross salary, 6.2% is for Social Security and 1.45% for Medicare.

In a normal year, William Fitzgerald works for Jeremiah Hansen as an accountant. His annual gross salary is $80,000. What is the total percentage of Fitzgerald's gross salary that must be paid as tax to Social Security and Medicare?

15.3% In a normal year, the employee and the employer each must pay 7.65% of the employee's gross salary (6.2% for Social Security and 1.45% for Medicare), up to $110,100. Therefore the total contribution made is equal to 15.3% of Fitzgerald's gross salary. (In 2012, the employee FICA portion has been reduced for one year to 4.2% from 6.2%)

Kenneth was born in 1946. He plans to continue working for another few years. As a financial planner, you would advise (or would have advised) him to retire in which year so that he gets his full retirement benefits?

2012 Those born before 1938 will be eligible for their full Social Security benefit at the age of 65. However, beginning in the year 2003, the age at which full benefits are payable will increase in gradual steps from 65 to 67. The full retirement age for those born between 1943 and 1954 is 66 years, which Kenneth will reach in 2012.

Jake and Polly Gill file joint income tax returns. Their adjusted gross income is $20,000 per year. Jake also receives nontaxable interest of $800 per month from his municipal bond portfolio. Each of them receives Social Security benefits of $500 per month. How much of their Social Security benefits will be taxable?

$1,800 Those who file a joint return may have to pay taxes of up to 50% of their benefits if both spouses have a combined income that is between $32,000 and $44,000. If their combined income is more than $44,000, up to 85% of their Social Security benefits are subject to income tax. Combined income is basically the adjusted gross income of both spouses plus nontaxable interest plus one-half of their Social Security benefits. Their nontaxable interest for the year is $800 x 12 = $9,600. Their Social Security benefits for the year are ($500+$500) x 12 = $12,000, so one-half is $6,000. The combined income of Jake and Polly = $20,000 + $9,600 + $6,000 = $35,600. Therefore, they have to pay taxes on 50% of $3,600. The rule states that the amount of benefits that will be included in the taxable income is the lesser of half of the Social Security benefits or half of the excess of the taxpayers' combined income (modified adjusted gross income plus half of Social Security) over the base amount. Therefore, they have to pay taxes on the lesser of 50% of their benefits or the amount that exceeds the threshold up to 50%, which in this case is $1,800. Their combined income is $35,600. The threshold is $32,000, so the excess threshold is $3,600 and only 50% is subject to tax, which is $1,800.

Michael is self-employed and earned $40,000 in a normal year. How much would Michael normally pay in Social Security taxes?

$5,652 Although Michael must pay the full FICA of 15.3%, he will receive a deduction for the employer portion. This is calculated by multiplying his income $40,000 by .9235 which results in $36,940 which is then multiplied by 15.3% to arrive at the FICA amount of $5,652 (rounded up to the nearest dollar).

Dan Shun is an airline pilot working for an international airline who will earned $130,000 in 2011. How much does Dan have to pay as Social Security and Medicare taxes?

$6,370.60 Both Dan and his employer must pay taxes for Social Security and Medicare. Dan's employer must pay 6.2% of Dan's income up to $106,800 and then 1.45% on all income above that level. Normally, Dan pays the same amount but in years 2011 and 2012, Dan's payment is reduced from 7.65% to 5.65% of gross pay up to an income limit of $106,800. Of this 5.65%, 4.20% is for Social Security and 1.45% is for Medicare. As Dan earns more than the $106,800 limit in 2011, he must continue to pay the Medicare tax of 1.45% on the rest of his earnings. The calculation is as follows: 4.2% of $106,800 equals $4,485.60 plus 1.45% of $130,000.00 equals $1,885.00 which totals $6,370.60. This is the total amount of FICA withholding for Dan for 2011.

Which of the following statements are true regarding earning credits.

- In 2012, a person will earn one credit for every $1,130 they earn. - Most people need 40 credits to qualify for benefits. In 2012, a person will earn one credit for every $1,130 they earn up to 4 credits per year. Extra credits do not increase their eventual Social Security benefit. However, the income they earn may increase their benefit. Most people need 40 credits to qualify for benefits.

When a worker starts collecting Social Security retirement or disability benefits, other members of his or her family also may be eligible for payments. Which of the following family members can be paid benefits?

- A worker's spouse taking care of children who are 10 and 12 year old. - A worker's child who is 17 and in high school. A worker's children can get paid benefits if they are: unmarried and under age 18, under age 19, but in elementary or secondary school as a full-time student, or age 18 or older and severely disabled and the disability must have started before age 22. In addition, a worker's spouse may be paid benefits at any age if he or she is caring for the individual's child who must be under age 16 or disabled and receiving Social Security benefits.

Hans, age 65, has just retired and started collecting his Social Security retirement benefits. His wife, Martha, is 57 years of age and has stayed at home raising their children while Hans was the breadwinner. They have four children who are living with them at present. Andrew, age 21, is studying in college. Peter, age 19, met with an accident and is severely disabled. Sandra, age 18½, has dropped out of school while Karen, age 14, is going to school. Which of the members in Hans's family are not eligible to receive Social Security benefits based on his record?

- Andrew - Sandra Martha is under age 62 but she can receive benefits because she is caring for Karen who is under age 16. Peter is disabled and above 19, so he can also receive benefits. Karen is under age 18 and is eligible for benefits. Andrew is not eligible by any of these rules. Sandra is also not eligible, because although she is under 19, she is not studying full-time in any school.

Freda had a road accident that was near fatal. This happened on September 29, 2011. She applied for disability benefits from Social Security on October 11, 2011. Her claim was approved in November 2011. When did she actually start receiving the benefits?

- April 2012 Monthly disability benefits will begin with the sixth full month of a person's disability. March is the sixth full month that Freda is disabled, so her benefits begin that month. As Social Security benefits for the month are paid the following month, she will receive her March benefits in April 2012.

Only those people who paid into Medicare are eligible to secure Medicare Part A. State True or False.

- False Even if a person has not paid into the system, a person can enroll in Medicare Part A by paying the required premium.

To motivate individuals with a disabling condition to go back to work, Social Security will continue to pay a partial benefit to the individual for an extended period of time. State True or False.

- False Special work incentives provided by Social Security allow disabled persons to work for a period of time without reducing their benefits.

It is the employer's sole responsibility to keep the employee's record of earnings correct with the Social Security Administration. State True or False.

- False The employee shares responsibility with the employer for making sure that all the earnings have been reported and they are accurate. The accuracy is important because the employee's benefits will be based on this record of lifetime earnings.

Zane retired from his full-time job in December of 2011 at age 62. From the next month on, he began receiving Social Security benefits. Based on his earnings and the reduction for early retirement, he was entitled to a monthly benefit of $1,000. On January 2, 2012, he got a part-time job at the local supermarket in his neighborhood where he earned $1,500 per month. How will his Social Security benefits be affected by his job at the supermarket (assuming he continues to work at the supermarket for the balance of 2012)?

- He will have to return $1,680 of his benefits to Social Security. Because Zane is under age 65 and has earned income in 2012 in excess of the base amount of $14,640, $1,680 of Social Security benefits will be reduced in 2012, computed as $18,000 of income ($1,500 x 12 months) minus $14,640 x 50% (for every dollar above the $14,640 amount, 50% of the amount is lost).

Jenny needs 40 credits to qualify for benefits of Social Security. Her annual income is $80,000. Pick out the statements that are true regarding Jenny's credits in 2012.

- Jenny will get one credit for each $1,130 she earns not to exceed 4 quarters during a calendar year. - Jenny will have to work for at least 10 years to earn the required 40 credits. - Increased income will increase her Social Security benefits up to a maximum. As Jenny works and pay taxes, she earns Social Security credits. In the year 2012, she will earn one credit of each $1,130 of earnings. However, Jenny must work for at least 10 years to qualify for benefits because she can get only a maximum of four credits per year. Although her income is higher, it will not increase her eventual Social Security benefits. The amount of income she earns will increase her benefits up to just the maximum credits available.

What is the country's basic health insurance program for people 65 or older and many people with disabilities called?

- Medicare Medicare is the country's basic health insurance program for people who are age 65 or older and many people with disabilities. Medigap policy is a supplemental insurance that private insurance companies sell to fill the gaps in Medicare. Medicaid is a health care program for people with low income and limited assets. Mandatory taxes paid based on a worker's earnings contribute towards the funds for Social Security and Medicare.

Thomas Lambert is 66 years old and finds that he just cannot stay at home after his retirement from his full-time job. He has not signed up to receive Social Security benefits as yet, because he plans to get a part-time job soon. How much can he earn annually without adversely affecting his Social Security?

- No limit Some people, like Thomas Lambert, continue to work full-time beyond their full retirement age and they do not sign up for Social Security until later. This delay does not affect their Social Security benefit adversely. On the contrary they earn special credits that will result in an increase in Social Security benefits when they actually start receiving them. There is no limit to how much they can earn during this time.

In what circumstances would a child (under age 18 and unmarried) receive Social Security benefits?

- Parent is disabled - Parent has passed away - Parent has retired If a parent passes away, is receiving retirement benefits, or is receiving disability benefits, a child may receive Social Security benefits, depending on their circumstances. There is a cap to the total family benefits that can be received. Regardless of when a worker wants to receive retirement benefits, a worker needs to be at least 62 years old to start receiving any retirement benefits.

Social Security's definition of disability is very specific. What are all the requirements that a person must meet to be considered as disabled by the Social Security Administration?

- The person cannot perform any substantial work. The impairment must be expected to last at least 12 months or result in death. - The disability is expected to result in death. Persons are considered disabled if they cannot do the work they did before. The Social Security administration must then decide that the disabled cannot adjust to other work because of their medical condition(s). Moreover, the disability must last or be expected to last for at least a year or to result in death. In contrast the dictionary defines disability as a physical or mental condition that prevents a person from leading a normal life, which is not specific and therefore can be debated from person to person.

Special credit is given to people who delay retirement beyond their full retirement age. For people reaching full retirement age in 2012, the rate is 8% per year.

- True

When a worker dies, the surviving spouse and ex-spouse can collect benefits under Social Security if he or she meets certain qualifications. Which of the following are qualifications?

- a widow or widower who is 50 or older and disabled - a widow or widower at any age if she or he is caring for a child under age 16 - a widow or widower who is 60 or older To collect benefits, a surviving spouse must be: 1) 60 or older, 2) 50 or older and disabled, or 3) caring for a child under age 16 or a disabled child who is receiving Social Security benefits. To collect benefits, an ex-spouse must be: 1) 60 or older, 2) 50 or older and disabled (and have been married to the worker for at least 10 years), or 3) any age if caring for a child under 16, 4) ineligible for an equal or higher benefit on his or her own record, and 5) currently unmarried.

George Bailey has worked at Ethos Inc. for the past 21 years. When George retires in March 2012 at age 62, he will be eligible for Social Security. According to the rules of Social Security, his age for taking full retirement benefits is 65 and 6 months. However, he prefers to start receiving benefits before he reaches his full retirement age. What would be the percentage of reduction in the benefits that George would have to take if he decides to take it in 2012?

22.5% - No matter what his or her full retirement age is, a worker may choose to start receiving benefits as early as age 62. However, receiving benefits early will result in reduced benefits. They are reduced 5/9 of 1% for each of the first 36 months and 5/12 of 1% for each month in excess of 36 months. In George's case, 36 months @ 5/9 of 1% = 20% and 6 months at 5/12 of 1% = 2.5% for a total of 22.5%.

A person must receive ___ months of disability benefits before they are automatically enrolled in Medicare Part A?

24

Mike worked part-time in the year 2012 and earned $3,800. How many credits of coverage will Mike receive for Social Security purposes?

3 Three credits, one quarter for every $1,130 for 2012 earned, regardless of when it was earned.

What is the earliest age that a person can collect his or her own retirement benefits?

62 years Age 62 is the earliest a person can collect Social Security retirement benefits. Those who are already receiving widow's or widower's benefits, including divorced widows or widowers, can switch to their own retirement benefits as early as age 62.

How can you find out who your beneficiaries are on your social security record?

Social Security records do not have named beneficiaries. The Social Security Act specifies which family members can receive benefits on one's recored when they retire, become disabled, or die.