Filed under: Business Taxes, High Income Earners, Individual Taxes, IRA, Tax Preparation, Tax Preparers, Tax Tips, Taxes
Today I want to talk about tax planning, and why it’s so important.
I recently got a call from a woman who wanted to take $30,000 out of her IRA to buy something special. She went to her financial planner to take the money out and he told her that she needed to take another $7500 out just to cover her taxes, but to talk to a tax person first. So she called me.
Well, I ran the numbers for her and if she took $37,500 out of her IRA , it was going to cost her over $9,000 in state and federal taxes combined. Even though she would be withholding $7500 for her federal taxes, she’d still have to come up with another $2000 to be whole. Then we started talking.
You see, she didn’t need to make the purchase right away, she was just thinking about it. So I decided to see what would happen if we split the $30,000 between 2013 and 2014, $15,000 each year. What a difference! Instead of paying over $9000, she’ pay $688 per year total for her state and federal income taxes combined. That wasn’t a typo–six hundred and eighty-eight dollars a year. $1376 total tax for a savings of over $8000!
So by waiting for another 60 days to take half the money she wanted out of her IRA she’d save $8000. How cool is that?
In fairness, the woman’s particular situation just put her into a sweet zone for this to work out so well. For many people, splitting up the IRA withdrawal would not save them any taxes at all. But my point is–how do you know? By taking the time to ask–she saved $8000.
What’s going on in your life that could benefit from a little tax planning? Selling some stocks or mutual funds? Donating to charity? Do you own a small
business? Are you getting married? Getting divorced? Having a baby? Getting a new job? Buying a home? Any of these events, and many more, could use
a little tax planning.
My business card says, “If you don’t have a tax strategy, you’re probably paying too much.” It’s true. So often in my job, I’m trying to help people who’ve already made decisions and come to me when its’ too late to make changes. Why would you want to give the IRS more money then you need to? It’s not rocket science, it’s just common sense. The best way to keep more of your money is to make a plan for keeping it. Call me. I can help.
Why doesn’t my QuickBooks balance match my bank balance?
Whenever you issue checks to vendors, there is no saying how long it will take the vendor to deposit the check into their bank account. This represents a “timing difference”. For instance, if you issue a check on March 29th, and the vendor doesn’t deposit the check until June 29th (For whatever reason) there is a significant timing difference between when this check was entered into your accounting software and when it effectively hits the bank statement. Timing differences are the main reason why your QuickBooks balance doesn’t match your actual bank balance and they happen quite frequently.
Your QuickBooks balance, assuming you are on top of your data entry duties, is a more accurate picture of your bank balance alone as it takes into account the floating checks and already subtracts that cash from the bank account balance. It also accounts for deposits in transit (deposits that have not yet hit the bank statement). Timing differences won’t exist however, if your checks and deposits clear within the final days of the month.
The goal of a reconciliation is not to find the discrepancy between your accounting software balance and your bank balance because of timing differences. These are normal discrepancies. The goal is see if this discrepancy is a result of error from the accounting system or error from the bank (Yes-sometimes the banks screw up too!)
Think of it as a way to verify that your cash from your company books is consistent with your bank statement records. Since the ability to acquire and obtain cash is the beating heart to any business, small or large, the cash account, or multiple cash accounts deserve specific attention. The phrase “Cash is King” has been merited all these years with great reason.
The Bank Statement Formula
Consistent with any bank statement is the formula used to determine how we get to the ending balance from the beginning balance. The formula is stated below:
= Beginning Balance
+ Deposits and other Credits
- Withdrawals and other Debits
- Service charges
= Ending Balance
This is the formula that is being used to determine the reconciliation difference.
Reasons to do bank reconciliations
- Internal control – tracking the inflows and outflows of cash is crucial in determining if someone with check writing authority is abusing their power.
- Determining if there are missing transactions—the bank reconciliation helps determine that all of your cash transactions are in your accounting system.
- To see if companies are taking advantage of you—Sometimes humans make mistakes and might run your card twice on accident but sometimes it’s no accident.
- Discovering bank errors or accounting software data entry errors
- To give a true accurate depiction of the money in your bank account. For example, take a property management company. They may manage properties in Florida, California, Missouri, and Illinois. With hundreds of checks being written and mailed, it is absolutely crucial to know what checks are still outstanding because these vendors can deposit the check at any time. Some vendors take months to deposit checks (I’ve seen it before and I’ll see it again.)
So there you have it. Now that you know why you should do a bank reconciliation, read my next post about how to do a bank reconciliation.
What Documentation Do I Need To Support My Tax Return?
I recently got an e—mail from my friend Steve who was concerned that he was keeping his records for too long. He was looking to purge some of his files and he also wanted to know if he was overdoing it on his documentation. Steve owns a small business. This is part 2 of a series—http://robergtaxsolutions.com/2013/11/does-this-make-my-files-look-fat/.
In my last post I talked about the IRS rules for record keeping. The problem I find with the IRS post is they tell you to keep records for your tax returns, but they don’t tell you what records to keep. I’m going to go over those here. Part of my job as an Enrolled Agent is to assist people who are getting audited. So, based upon my audit experience I think you should keep the records that the IRS will ask for in the event of an audit.
Bank Statements—if you own a small business, you should have a separate bank account for the business. In an audit, the IRS will always ask for copies of the bank statements.
Deposit tickets—Granted, your deposits should all be reflected on your bank statement, but they always ask to see those so hang onto them as well.
Receipts for expenses— always good to have.
Mileage logs—if you claim mileage you should have a log. Hold onto these—they are like gold.
Your QuickBooks or other accounting software records.
Now for space purposes—you can have all of these things scanned and saved on disc or on the cloud. I like to keep the paper around for at least three years, but after that, as long as you can access the scanned documents you should be good.
Here’s the funny thing—the better you are at keeping records, the more stuff you can throw away. Counterintuitive, right? Let me explain, let’s say you use QuickBooks, and you purchase a few cases of paper and other stuff from your local office supply company. They deliver the paper and goods and send you a bill. You write them a check and log into QuickBooks something like Check #1241 to Office Supply Solutions for $162.47 paid on October 31, 2013 from Bank of America checking account and expensed as office supplies. It’s all right there in your QuickBooks transaction.
Now, for the three years, I would still hang on to the Office Supply Solutions receipt, I’d keep my bank statement, and my checking account register. But after five years, I’d let those receipts find their way to the shredder. (Yes, the IRS says three, but I’m paranoid.)
If your records are good, you don’t need to hang on to stuff for as long because you documented everything and it will tie to your bank statement. Three years from now when you’re getting audited, you’ll have no clue what check number 1241 was for—you don’t have to, it’s in your QuickBooks.
But if your records are bad—that’s when you really need them. Let me explain—
Let’s say I don’t use accounting software, I don’t maintain a separate bank account for my business, and I don’t keep a ledger of my expenses. One day the IRS decides that I’ve over claimed my expenses (meaning that my income is actually higher.) Remember my last post? If the IRS believes that you underreported your income by 25% or more, the statute of limitations on an audit is 6 years instead of three. (If they think it’s fraud, it’s open season on your forever.)
Well, the person with good records still has his QuickBooks account and matching bank statements. Everything ties. Easy audit—in, out and outta there.
The person with the bad records is going to have to dig and find that office supply receipt, find cancelled checks (who still get cancelled checks anyway?) or somehow prove the expense. Can you pick up a random bank statement from three years ago and look at a check number without copies of the cancelled checks and tell what that check was written for? Even if you can, the IRS auditor isn’t going to believe you without a receipt to back it up.
So keep good records now, so you can thin out your files later.
Can You Have Too Much Documentation?
I recently got an e-mail from my friend Steve who was concerned that he was keeping his records for too long. He was looking to purge some of his files and he also wanted to know if he was overdoing it on his documentation. Steve owns a small business.
Personally, as an accountant, when Steve told me about his recordkeeping–I was just so excited! He kept such good books. But at what point do you not need all those records?
I’m posting what the IRS says on its official website in red. My comments are in black.
Note: Keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return. I would also add that you should keep the official tax documents that go with the return, especially things like 1099s and W2s if you are an employee. Keep anything that shows a tax payment.
According to the IRS, your need to hang onto records depends upon your situation. The situations are as follows:
You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years. What they mean is that if you don’t have any tax problems, you only need to hold on to your tax returns for three years. That’s how long the IRS has to go after you for a simple mistake like leaving an interest statement off your return. So here’s my issue with this–what if you don’t know you have a tax problem? Like what comes next—
You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years. Bingo! This is why I don’t approve of tossing documents after only three years. Here’s a good example–let’s say you’re a senior citizen with some social security, a pension, and some stocks. You sell $10,000 worth of your mutual fund for your living expenses but you had a loss so you don’t think to even put it on your tax return. (That’s a very common mistake.) So even though the missing item on your tax return was a loss, to the IRS, its $10,000 and hit’s the over 25% mark.
You file a fraudulent return; keep records indefinitely. Okay, so if you’re filing fraudulent returns, keep your records forever. Ahem…people who intentionally file fraudulent returns–well that’s just not my specialty. But normal people who screw up their returns–that is. The IRS has a hard time telling the difference between criminals and good people who do stupid things.
You do not file a return; keep records indefinitely. Okay, I say file a tax return every year whether you are required to or not. It helps protect you from identity theft and it protects you from the IRS coming after you to taxes later because you missed a document.
You file a claim for credit or refund* after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later. That means if you filed an amended return to get back more money, hold on to your records for even longer.
You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years. That makes sense.
Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later. The IRS is very touchy about employment taxes. These are really important.
Of course, records relating to assets that you own should be kept for at least as long as the asset is in the business. For example: You buy a computer and you’re depreciating it for 5 years. You must keep the receipt for that for the whole five years. You buy a business building–you hang onto that document for the whole 39 years or until you sell the building.
So here’s my “Jan Rule” on keeping tax records. If you own a small business, keep your actual tax returns and back up for at least 10 years. In my next post, we’ll talk about what back up you’re going to want to keep.
Have you gotten a letter from the IRS that says something like this?
“The income and payment information we have on file from sources such as employers or financial institutions doesn’t match the information you reported on your tax return. If our information is correct, you will owe…”
That letter is called a CP2000—it’s from the Individual Automated Under Reporter Unit of the IRS. In 2012, they issued 4.5 million notices with an average of $1,572 in additional taxes owed. That’s over $7 billion dollars!
Just because you receive one of these CP2000 letters, doesn’t necessarily mean that you owe the IRS any money. So before you go writing the IRS a check, you need to take a look at your tax return and the CP2000 letter very carefully to make sure you owe before you pay. Let’s take a look at some of the most common things the IRS is asking about.
Missing W2: You’d be surprised how many people forget a W2 off of their tax return. It’s easier than you’d think. You could have a Christmas season sales job at Macy’s in 2011 but get a pay check for one day in January 2012. When you file that 2012 tax return in 2013, you’ve forgotten about that one paycheck. If you moved during the year, you might never get your W2. If you forgot a W2 on your tax return, usually it’s just best to sign the letter and pay the tax.
Missing stock trades: This is probably the most common type of CP2000 letter that I see and they fall into two categories. The first is employee stock options. If you work for a company that issues employee stock options, when you exercise those options, you pay the tax through your payroll withholding. Even though the stock options are accounted for in your paycheck, you still have to do additional paperwork on your taxes. If you don’t also report the employee stock options on a Schedule D, you’ll get an IRS notice. Usually, if this is what happened, you won’t owe any additional tax, you just need to submit the missing paperwork.
The other category of missing stock options consists of trades that just weren’t reported. Many people who made the election to receive their brokerage notices online didn’t realize that their 1099B notices were online also. I think that’s one of the most common reasons I’ve heard for people not reporting their trades. If you fall into this category, remember that the IRS doesn’t always include stock basis when they figure your tax. If you have stock trades on your CP2000, you’ll need to prepare an amended return and be sure to include the basis of all our stock trades. You may still owe the IRS money, but I’ve never seen one of these cases where the person owed the IRS the full amount that the IRS stated.
Mismatched documents: This happens all the time. For example, let’s say that you have three accounts at Bank of America. One earned $10 interest, another earned $15, and the other earned $20 of interest. You put $45 of interest down on your tax return. And that’s right. But the IRS may get the documents as 10; 15; and 20 and since it’s a computer and not a human that does the matching, you could get a notice saying you didn’t report your interest properly. You can usually solve issues like that with a simple phone call.
These are just a few of the more common and easy ways to solve CP2000 issues. If you receive a CP2000 letter and it doesn’t make any sense, or you just need some help, please call us. That’s what we do.
Check out the IRS link as well: http://www.irs.gov/Individuals/Understanding-Your-CP2000-Notice
If you normally use your income tax refund to pay for your Christmas presents, listen up. You’ve got a problem.
First, nobody is doing Christmas loans. Remember when H&R Block and Jackson Hewitt used to provide loans against your refund? Then the IRS changed the “debt indicator” which made it almost impossible for anyone to offer those loans. A few companies provided Refund Anticipation Loans, (the loans where you got your refund in 1 or 2 days instead of two weeks) but they were few and far between. Most people had to wait for two to three weeks to get their refund.
Now the IRS has announced that tax filing will be delayed—meaning that instead of accepting tax returns on January 21st like they had previously announced—they won’t accept returns until January 28th, and maybe not until February 4th.
What does this have to do with Christmas? Well, if you’re putting holiday gifts on your credit card in the hopes of paying it off with your tax refund—you’re not getting your refund until mid to late February at the earliest. If you can’t afford to pay your credit cards without your tax refund—you’ve got a problem.
So what other options do you have? For some people, if you know that you’re going to have a refund on your taxes, you can change your withholding now so that you get more money in your paycheck. If you’re reading this in October or early November, you’ve got a chance to put away some extra cash for presents. If it’s already December by the time you see this—it’s probably too late.
Here’s something else you need to know. If you have your taxes done by one of those corner shop tax companies, they will gladly take your money and tell you that they’re filing your return. You might think that you’re filing on January 3 or 4th, but you’re not. What they’re doing is “stockpiling” your return. They hit a button, it gets sent to a big corporate server, but it just sits there until the IRS says they’re accepting returns.
Why is that important to know? Because people think that they need to file early to get their refunds. But those early returns are often wrong. They’re missing information, or the software’s not fully functional yet. The IRS needs time to work out the glitches and if the IRS is having glitches, so are all the other tax companies. If you have the big green tax company send your tax return to their server and then you discover a problem with it, you can’t take your tax return back. It’s too late. And if your tax return is sent in with a mistake it could delay your refund for weeks, or even months.
There aren’t a lot of options out there for using your upcoming tax refund to pay for this year’s holiday gifts. But you know what? Christmas comes every year. Every year! Once you do receive your refund, it might be the only time in the whole year that you’ve got extra cash. Take some of your refund money and stick it in the bank so you’ve got cash to pay for your 2014 Christmas. Seriously, you never want to be dependent upon the IRS for you to have a Merry Christmas.
Wait right there. I can hear you through the computer. “How stupid does she think we are?” “Who doesn’t know how to put their name on a tax return?” “I’m not a moron you know.”
Yes, I know you’re not a moron. (And no, I can’t really hear you through the computer, I’ve just dealt with this issue enough that I know what people generally say.) For 99.9% of you, you put your name on the tax return and that’s it—no problem. But there’s always that small number of people every year whose tax return gets rejected because, according to the IRS, their name is wrong. This is about fixing those returns.
Number 1: Often when you get an IRS “name error” message, it’s not your name that’s the problem at all. It’s your social security number. Check that first to make sure you didn’t transpose a number. If that’s the problem, you may need to re-input your whole tax return. My current software lets me correct a bad SSN, but I used to use one that made you do the whole return over. That’s not fun.
Number 2: You didn’t change your new married name with the Social Security office. Many women get married and change their names. They tell their friends, they tell their work, but they forget to do it officially with Social Security. When they file their tax return with their new married name—reject! They don’t exist. You’ll need to file the return with your old name on it. You can still do file as married, you’ll just use your maiden name. Then go to Social Security and give them the new name. Here’s information on how to do that: http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/315/session/L3RpbWUvMTM4Mjc5MzQ0Ny9zaWQvKkRTVzFNRGw%3D
Although it will only take about 10 days to get your new social security card, it will take about 8 weeks to get your name into the federal computer system. If you’re looking for a refund, or have a filing deadline, just use your old name for now and the new name next year.
Number 3: You really spelled your name wrong. You’d be surprised how easy this is. We double check our numbers –of course, it’s taxes. But we don’t double check spelling our names. Why would we, it’s our name? We know that. But you know how it goes, “tiye dubfwea di ib rgw qeibf jwta”. I mean, your fingers go on the wrong keys.
Number 4: If you’ve double checked your SSN, and your name is spelled correctly and you’re not recently married and you’re still getting a reject notice—you’ve got to pull out your actual social security card as see what it says. On newer social security cards, the last name is printed under the first and middle names. For example, Hillary Clinton’s return might be getting rejected because it should really say Hillary Rodham Clinton on it.
Number 5: It’s wrong at the IRS. It’s possible. If you’ve checked everything on this list, including pulling out the actual SS card and checking everything and you still have the “wrong” name, you can still paper file the tax return, just to get it submitted. You’ll still want to follow up with the IRS and Social Security and get your name fixed. If you’ve filed returns before, you can get a transcript of your old return from the IRS. Your transcript will have the name that the IRS has for you on it. Here’s a link for that: http://www.irs.gov/Individuals/Order-a-Transcript I know that sounds a little crazy, and even impossible, but I had to do that to once. Well, I knew the person’s name, but the IRS had something completely different!
One final name issue for people who paper file their tax returns: don’t forget to put your name on the tax return. Really! It’s one of the most common mistakes. People who e-file—you can’t forget to do that. People who paper file, they often do all of the math and plan on adding their name last. Then they finish their return and forget to put the name on. Back in the Stone Age when I was taking the income tax prep class, it was an automatic failing grade to not put a name on the return. I thought it was silly (they were fake names on fake returns!)
If you file a tax return with no name on it, then that means it’s not filed. If you don’t file your tax return on time, there’s a penalty of 5% per month of the tax you owe, up to 25%. If you’re expecting a refund, it won’t come. These returns just go into the trash. And yes, this still really does happen. I’ve had people come to my office with IRS letters telling the people they never filed. The taxpayer shows me the photo copies of his mailed tax return to prove he filed and right there in black and white is a blank space for the name. It’s a really easy mistake to make. It happens quite often (or I wouldn’t bother to write about it.)
***Roberg Tax Solutions congratulates the St. Louis Cardinals for making the 2013 World Series. We have been having “Cardinal Apparel Day” every day this week. As of now, the series is 1-1, game 2 was a Cardinals 4-2 win, and we are back on track after game 1’s ugly loss.
Let’s face it—this is the long lost question in the world of tax preparation. You probably have a better chance of Miley Cyrus stealing your “Go Cardinals!” foam finger than you do of being asked about this inquiry. This does not mean that people aren’t checking the box however. In 2012, there has been about $37 million contributed up to July with a total fund balance of about $232 million. Not a bad chunk of change. During my time in the Volunteer Income Tax Assistance Program—commonly referred to as VITA—other volunteers and I routinely asked the question because it was part of our standard operating procedure. I am not sure if the mainstream brick and mortar tax firms ask the question but I bet Jan knows.
Anyways, my point in this brief writing is to inform you about this tiny section of the 1040 series—the who, what, why, when, how, etc. of the presidential election fund or at least point you in the direction of knowing those questions.
2012 Form 1040 instructions page 12 states verbatim:
“This fund helps pay for Presidential election campaigns. The fund reduces candidates’ dependence on large contributions from individuals and groups and places candidates on an equal financial footing in the general election. If you want $3 to go to this fund, check the box. If you are filing a joint return, your spouse can also have $3 go to the fund. If you check a box, your tax or refund will not change.”
It is important to understand that that checking this box will not change your tax or refund. So what is actually happening? It means that you want $3 of tax dollars you already owe to the government to go towards the Presidential Election Campaign Fund (PECF). When you check the box, the government has to allocate that $3 into the PECF. So there is no tax incentive to check or not check this box. This is a valid reason for self research about the fund to make a well informed decision and to support your reasons for doing so.
In 1975, the Federal Election Commission (FEC) was born to oversee the Federal Election Campaign Act (FECA). This is the law that governs the financing of federal elections. Obligations of this independent agency include the divulgence of campaign finance information, enforce limits and prohibitions on contributions, and become the all seeing eye of Presidential election public funding.
Furthermore, the agency is made up of six members that of which are appointed by the President of the United States and contingent upon Senate approval. Each member serves a six year term. Stated precisely from http://www.fec.gov/about.shtml, “By law, no more than three Commissioners can be members of the same political party, and at least four votes are required for any official Commission action. This structure was created to encourage nonpartisan decisions.”
It was that the check box used to be $1 dollar but increased to $3 in 1994 by Congress. Extensive detail about the $3 check off can be found at http://www.fec.gov/pages/brochures/checkoff.shtml. The information is well put, easy to read, and concise.
The Federal Election Commission has charted the Fund since its 1976 inception. The most recent chart can be found here: http://www.fec.gov/press/bkgnd/pres_cf/PresidentialFundStatus_September2012.pdf.
If the candidates decide to use the fund money, they must agree to a spending limit. In the 2012 election, neither Barack Obama nor Mitt Romney used the Presidential Election Fund resulting in a very expensive election.
I hear this question all the time. We all put our own money into Social Security so how can it run out of money?
First, let me point out that Social Security is not out of money. It’s estimated that it could run out of money by 2035 if changes are not made, but it is not out of money yet. But, how could it run out of money if it only pays out what we pay in? The problem is–and I hate to call this a problem, but we’re living too long. (Like I said, hate to call that a problem.)
Let me use a real example of a real person. I’ll call him Sam. Over the years, Sam has paid $120,698 into Social Security. His employers have paid $131,693. So all together, $252,391 has been paid in.
According to Social Security, Sam will receive $2,611 a month in benefits. At that rate, Sam basically uses up all his money in just over 8 years. ($252,391 divided by $2,611 = 96.66 months. 96 months divided by 12 months = 8 years) So assuming that Sam retires at age 66, if he lives to age 75 then he’s used up all the money put in for him in the first place.
But you don’t quit getting social security when it runs out. Social security payments go on until you die.
But what about interest? Isn’t the money invested, shouldn’t it go farther?
Well yes, I did over simplify things. The Social Security trust funds are invested in “special issue” securities of the US Treasury. For 2012, the annual effective interest rate of return was 4.091%. (But that’s because of some special circumstances, the actual rate right now is closer to 1.48%.)
There is no social security withholding on wages over $113,700. Why can’t the wealthy just contribute more to social security?
I hear that all the time too–why not just have the higher income people keep contributing and eliminate the cap–but here’s a catch–if you are supposed to take out what you put in–then those higher wage earners are going to want to take out what they put in too. Given that people are living longer than their benefits are holding out–do you really want people taking even higher benefits? That would actually make the situation worse than it already is.
Let’s go back to Sam for our example. If Sam lives to age 80, that’s 4 extra years of social security. At his current rate of $31,332 a year, that’s an extra $125,328 more than what he originally paid in. In reality, Sam earns well above the social security base wage. Let’s say his contributions to social security are unlimited. Based upon Sam’s “unlimited” contributions, when I run the numbers, I get Sam’s monthly payment to be close to $7,500 a month ($90,000 a year.) Now if Sam lives an extra 4 years, that’s $360,000 more than what he paid in. So having the wealthy pay in more to social security actually costs more than keeping it capped like it is now.
So how do we “fix” social security? I wish I knew the answer to that one, but I don’t.
Social Security would rather have you retire at age 62 than at your full retirement age. That sounds a little backwards, but it’s all about money. (Of course!)
When Social Security started back in 1935, the average person died before ever claiming any benefits. Now, people are living longer than ever and Social Security payments continue through the end of your lifetime and even beyond for widow(er) benefits.
So, if the Social Security Administration is paying out so much money, why would they want you to retire early? Let’s do the math. (Don’t worry, I’ll keep it simple.)
Frank has worked all his life and he’s tired. He doesn’t have to, but he’s thinking about retiring at 62 so he can spend more time with his wife, Delores. If Frank retires at his full retirement age of 66, his monthly Social Security benefit would be $2,000 a month. If he retires at age 62, he’ll get $1,500 a month.
So the first round of math is going to be–how much does Frank get before he ever turns 66? He’s got 4 years of benefits, 12 months in a year, at $1500. So he gets $72,000.
$1500 per month x 12 months = $18,000 per year
$18,000 per year times 4 years = $72,000 per four years
So at first blush, it makes a whole lot of sense for Frank to take the money and run.
If Frank waits until he’s 66 to start claiming Social Security benefits, how long would it take for him to make up the $72,000 that he’s lost by waiting? He’d catch up at age 77. So if Frank’s family has a history of dying young–it might not make sense for him to wait until he’s 66 to retire. You can do that math with different numbers, but generally it will take 12 years to catch up to your benefits.
But what if Frank comes from a family with an average life expectancy of 90 years? What then?
Remember, by retiring early, Frank loses 25% of his payment every month. In this case, that amounts to $6,000 a year ($500 a month x 12 months). So if Frank catches up at age 77, then he’s got 13 more years with $6,000 a year extra, now Frank is ahead by $78,000.
According to Social Security Statistics, the average person today lives to be 83 years old. Going by the numbers, Social Security saves money on people claiming their benefits at age 62.
This is a very simplified example. Frank has many things to think about–his wife’s benefits, what if he waits until age 70, how long does he expect to live? What other benefits might he be entitled to? Social Security won’t tell you all of your options. If you call them to file for benefits, they take your application and you’re done.
At Roberg Tax Solutions, we’ll sit down with you and chart out your benefits so that you know all of your options. At the end of the day, the decision is yours, but you deserve to know what all your options are before you have to make that decision.