How Should My Wife And I Report Our Earnings?

Dec 28 2016 - 11:30am

I've operated my own real estate brokerage in Michigan for several years and am re-examining strategies I've employed for the past 10 years or so regarding the maximizing of both my wife and my future social security benefits. My wife and I are both 66 and we decided based on our health, continued income, savings, etc. to put off filing for SS benefits until age 70. I brought in my wife as an assistant in the business a few years ago for the sole purpose of generating credits for her Social Security benefits (she had been a stay-at-home mom for all but a few years of our 46 year marriage and paid very little into the System even during those years). According to recent annual statements from the SS Administration she has "enough credits to qualify" for benefits, albeit minimal based on reported income.
It is my understanding that the calculation for the Social Security benefit amount involves taking a person's 35 years of working. Her record shows 25 income years (some very minimal) and mine at 35 years as of 2015 (again, some with minimal income due to the nature of the sales business). Obviously my wife has 10 "vacant" years of the 35 years used in calculating SS benefits.

QUESTION: Is it more advantageous for me to divert more--or less--income to my wife for reporting purposes, in terms of benefiting from what awaits us when we begin taking Social Security benefits at age 70? Since each of the income reporting is 1099-based, there is no taxable advantage or disadvantage that I've seen, as we file jointly.

Hi,

I should preface my answer by pointing out that I'm not a lawyer, nor a tax expert. So, I can't tell you whether or not the manner in which you are dividing the business income is legally permissible. It sounds like you've been reporting the business earnings, at least in recent years, as a husband & wife partnership, and I believe that the general rule is that the business income should be distributed per the terms of the partnership agreement (https://secure.ssa.gov/apps10/poms.nsf/lnx/0301802334).

That said, the answer to your question depends largely on your and your wife's relative benefit rates. If her own full retirement age benefit rate (PIA) is significantly less than half of your full retirement age rate, diverting more of the business income to her record may a waste. This is because she could potentially receive half of your full retirement age benefit rate as a spouse when you start your benefits, so additional earnings would only help her if her own benefit rate would be higher than the spousal rate.

If your wife's benefit rate on her own record would be less than half of your full retirement age rate even if she waited until age 70 to start drawing, then it would be advantageous for her to start drawing her own benefits now as opposed to waiting until age 70. What you may want to do is run the maximization software available on this website. That will not only help you determine when you and your wife should file for benefits, but it also allows you to enter projected earnings in order to determine the effect of additional earnings on your benefit rates. The software allows you to run 'what if' scenarios, which should enable you to determine which of you would benefit most from additional earnings.

Best, Jerry