Tax Guru – Ker$tetter Letter

Q-1:

Subject: early social security

If one takes social security @ 62 and earns more than 12K but puts the excess amount in a defered program like 401K is the earned income still counted as earned income

A-1:

Unfortunately, putting a huge chunk of current W-2 income into a deferred comp plan in order to avoid the SSA’s penalty on those with excess earned income (over $12,960 in 2007) would be too easy.  SSA counts the full amount earned during the year, which is normally going to be the amount subject to MediCare tax, not the smaller amount subject to income tax.

There aren’t as many opportunities for avoiding this penalty by W-2 wage slaves as there are for self employed individuals, who have several very easy methods to accomplish this since SSA looks at the net Schedule C income and not the gross pay, as they do for W-2 recipients.

I hope this answered your question.

Kerry Kerstetter

Q-2:

Sec 125 and flexbenefit plans are not subject to SS so if all the money went into pay for sec 125 benefits would that work?

A-2:

It’s my understanding that SSA doesn’t look at those kinds of benefits as part of their earned income calculations.  So, if they don’t show up in the Medicare Wages box on the W-2, I don’t see how they would be part of the benefit reduction process.

Depending on how much money you are talking about shifting to tax free benefits, you need to be very careful that the amounts are reasonable and in compliance with the kinds of expenditures spelled out in the business’s particular Section 125 benefit program and are not disguised compensation.  In this matter, there is more potentially to fear from IRS attempts to reclassify it as taxable income than from SSA trying to use it to reduce benefits if things are handled properly.

Kerry