Taxable income and changes for Social Security benefits


 Q. I retired at age 55. I have exercisable stock options that I use to generate cash for living expenses. Upon exercise, Social Security tax is withheld and I get a W-2, reporting my taxable income from the exercise. I do not have to do this every year, and could skip making any exercises in 2014 and 2015. When I start collecting Social Security benefits at whatever age, will the fact that I don’t have Social Security taxable income in 2014 and 2015 reduce my benefits?

A. There’s a lot to consider here.

In general, in order to qualify for Social Security retirement benefits, for anyone born in 1929 or later, you need 10 years of work — 40 credits — to be eligible. People born before 1929 need fewer years of work, said Gerry Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

He said each year, your employer sends a copy of your W-2 (Wage and Tax Statement) to Social Security. The Social Security Administration (SSA) compares your name and Social Security number on the W-2 with their records. When they find your name and number, your earnings shown on the W-2 are recorded on your lifelong earnings record.

So when your benefits are calculated, SSA uses your lifelong earnings record. Your actual earnings are adjusted or “indexed” to account for changes in average wages since the year the earnings were received, Papetti said. SSA then calculates your average indexed monthly earnings during the 35 years in which you earned the most. SSA applies a formula to these earnings and arrives at your “primary insurance amount” or basic benefit.

“Therefore, if you have at least 10 years — 40 credits — on your earnings record, you are eligible for retirement benefits,” he said. “The fact that you do not have any earned income — income from the exercise of non-qualified stock options is considered taxable earned income — for 2014 and 2015 should not reduce your Social Security benefit amount.”

But, he said, if based upon your earnings history, you are not at the maximum benefit amount, not having the additional earned income in 2014 and 2015 may not increase your benefit had you had the additional earned income.

There’s more to consider.

Medicare premiums are based on your taxable income from two years prior, said Ronald Garutti, a certified financial planner with Newroads Financial Group in Clinton, so the Medicare premiums you would pay in any year would be based on income from two years ago.

How to get the most out of Social Security benefits is a hot topic right now, and it’s something worth paying attention to, Garutti said.

“In President Obama’s 2015 budget, the White House indicated it was considering changes to the strategy known as `file and suspend,’ which is available to all filers but is perceived as a strategy to help the wealthy,” Garutti said.

Learn more about “file and suspend” and why it’s so beneficial to so many.

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This story was first posted in November 2014. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.