Ex-Church of Christ Support Board

Is there anyone on here who understands the process of having benefits paid pre-tax or post-tax? Hubby want me to change to post-tax so more gets hit with SS taxes.

What benefits are you referring to?. I am guessing that any post-tax benefit provided by your company would not only be subject to SS tax but also income tax.

SS benefits are based on the average earnings over a 35 year period, so a year or two of increased SS income would have a negligible effect on your SS benefits, I think.

Agri, the SS or the IRS won't tell me anything. They both said I needed to hire a CPA to get answers to my questions. I was able to sign up for Medicare Part A thought.

Teresa, I agree with what you said. I don't see how having my benefits taken out post-tax for just one year will help my SS in any way. But Hubby, who fancies himself to be a born-again self trained accountant, seems to think it will. So he is determined to change my benefits from pre-tax to post-tax. I am fighting it. After all, it is MY paycheck he wants to monkey around with. I was just looking for some feed back that I can give to him.

I am no accountant, but it seems to be a really bad idea to me. You can always increase your withholdings for your income taxes.

For just one year? Sheesh.
But seriously, we have always had good info from the mysocialsecurity dot gov website and very good service from every Medicare/SS (your local SS office in town handles Medicare too) office we've visited.

SS/Medicare will send you - in the mail - a nice fat booklet about Medicare answering all kinds of questions. It should arrive within a year of your 65th birthday.
AARP (if you are a member) also sends COPIOUS information.

For stuff like you are asking, that is really a question that has to be answered to a tax professional who has YOUR PARTICULAR data plus knows about Medicare options - there are all kinds of optional things you can do, or not do, or do some, that affect your account - but seriously - for one year? I would think that would be almost irrelevant at that point.
But you could ask. A tax professional, though, would be the person to talk to. Who does your taxes?

Katisha

Checking with a tax accountant or planner sounds like a good idea. Your HR dept might be able to help also.

Before-tax deductions from your pay reduce your taxable wages. Some before-tax deductions will reduce only your federal and state, or W-2 wages, while others will also reduce your Social Security and Medicare wages.

After-tax deductions do not reduce your taxable wages. They are taken only after taxes have been withheld from your taxable wages.

To see which would be most advantageous, first I would calculate how much extra you would have to pay in income tax (using your highest tax bracket %, not the average %), social security tax (6.2%) and medicare tax (1.45%) for the years you continue working.

Next, I would calculate what your monthly SS benefit would be using the following formula for two scenarios (1) if your taxable wages remain the same and (2) if you increase your taxable wages by the before-tax amount. Subtract (1) from (2) to get the increase in SS monthly benefit and divide this amount by 420 months (35 years x 12 months) to figure out what you would get extra in SS each month.

SS benefit Formula:
(a) 90 percent of the first $926 in monthly earnings, plus
(b) 32 percent of monthly earnings over $926 and through $5,583, plus
(c) 15 percent of monthly earnings over $5,583.

If you delay taking social security for a few years, then you will receive 8% extra in SS per year (up to age 70), so you can factor that into the extra amount also.

I would also factor in the fact that you will be paying extra taxes for a limited number of years, but may be receiving an increased benefit for 20 years.

example

Lets say your before-tax benefit is $6,000 and your highest tax bracket is 22%. If you change the $6,000 to an after-tax benefit, then Income tax is $6,000 x 22% = $1,320; Soc Sec tax is $6000 x 6.2% = $375, and medicare $6,000 x 1.45% = $87. If you work one more year, increase in tax is $1,779 and if you work two years, increase is $3,558.

(1) Lets say your current average monthly taxable earnings are $3,500. Using the SS benefit formula, 90% x $926 = $833, plus 32% x $2,574 = $823. Total monthly SS benefit would be $1,656.

(2) if there is $ 6,000 a year in extra taxable wages, that is, $500 extra per month, then you would get 90% x $926 = $833, plus 32% x $3,074 = $983. Total monthly SS benefit would be $1,816.

Subtract (1) from (2) = $160 extra benefit per month. $160 x 12 = $ 1,920 per year, averaged over $35 years = $54 per year or $5 per month extra benefit.

So if you change $6,000 to an after-tax benefit, and work one extra year it would cost you $1,779 in extra taxes and if you live another 20 years after retirement, you will receive 20 yrs x $54 = $1,080 in extra benefits in total for those 20 years. If you work two years, it will cost you $3,558 in extra taxes, and your total increased benefit is still only $1080.

I think that would be the way to calculate it, but check with someone to be sure.

You might want to consider moving this discussion to the Tea House.

Katisha

Happy Birthday!

I will move this discussion to Tea House shortly.

teresa wrote:Katisha

Happy Birthday!

I will move this discussion to Tea House shortly.

Thank you, Teresa.

teresa wrote:example

Lets say your before-tax benefit is $6,000 and your highest tax bracket is 22%. If you change the $6,000 to an after-tax benefit, then Income tax is $6,000 x 22% = $1,320; Soc Sec tax is $6000 x 6.2% = $375, and medicare $6,000 x 1.45% = $87. If you work one more year, increase in tax is $1,779 and if you work two years, increase is $3,558.

(1) Lets say your current average monthly taxable earnings are $3,500. Using the SS benefit formula, 90% x $926 = $833, plus 32% x $2,574 = $823. Total monthly SS benefit would be $1,656.

(2) if there is $ 6,000 a year in extra taxable wages, that is, $500 extra per month, then you would get 90% x $926 = $833, plus 32% x $3,074 = $983. Total monthly SS benefit would be $1,816.

Subtract (1) from (2) = $160 extra benefit per month. $160 x 12 = $ 1,920 per year, averaged over $35 years = $54 per year or $5 per month extra benefit.

So if you change $6,000 to an after-tax benefit, and work one extra year it would cost you $1,779 in extra taxes and if you live another 20 years after retirement, you will receive 20 yrs x $54 = $1,080 in extra benefits in total for those 20 years. If you work two years, it will cost you $3,558 in extra taxes, and your total increased benefit is still only $1080.

I think that would be the way to calculate it, but check with someone to be sure.

Hubby finally called someone at the SS department and she walked him through what affect going post-tax would have. It would raise my SS Benefit a whopping $5 a month. Needless to say we went ahead and submitted my benefits pre-tax. I can save more than that out of each pay check in my 401K.

Hubby gets a lot of ideas, many of which don't work out, because he sits in the house by himself all day. Since no family or friends will talk to him anymore, if it weren't for Facebook he wouldn't interface with anyone.