Would Additional Earnings Help My Wife More Than Me?

Dec 29 2016 - 11:00am

Larry: I posed a question earlier today that you answered a few minutes ago. However I believe your answer was based on some wrong assumptions concerning my situation:
1. I am a sole proprietor for tax filing purposes. My wife is not an employee or a joint owner/partner in my real estate business. We are only "joint" as tax filers.
2. She is NOT going to file for SS benefits until age 70, as is the case with myself (we are both 67 in 2017--she before me).
3. The amount paid to her annually that is reported as 1099 income from me varies, depending on the amount of the total business income for that year. In recent years I have reported up to approximately 1/2 of my own net income as her 1099 income, in an effort to bolster her income records for calculating SS benefits when she does file for those.

Would your recommendation be the same, given the above clarification (in which you suggested that if her projected SS monthly benefit is less than 1/2 of mine, there is no advantage to diverting my income over to her for SS purposes).


This information doesn't change my answer. Whether you've been splitting business profits with your wife in the manner of a partnership, or simply paying her as a non-employee and having her report the income as self-employment, the effect is the same. That is, it reduces your earnings and increases hers. And, unless you are earning more than maximum amount subject to Social Security taxes (i.e. $118,500 in 2016), the result is that your eventual benefit rate, as well as any potential spousal benefits for your wife, will be somewhat lower than it would have been if you hadn't split your earnings with your wife.

Splitting the business earnings with your wife may or may not be advantageous at this point, depending on your relative benefit rates. I'll explain by example why it would not be advantageous if your wife's own eventual benefit rate would be less than half of your full retirement age rate (PIA).

Say that your full retirement age rate is $2500. In that case, your wife could receive $1250 as a spouse on your record as soon as you start drawing your benefits. Then let's say her own full retirement age benefit rate is $800, but she waits until age 70 to file. That would raise her own rate by 32% to $1056, which is still less than her potential spousal benefit on your record. Then say you start drawing your benefits a few months later when you turn age 70. Your benefit amount would also be 32% higher, or $3300 (i.e. $2500 x 1.32), and your wife's spousal benefit from your record would be calculated as follows: 50% of your full retirement age rate, minus her own benefit rate inclusive of delayed retirement credits. The result is that, in this example, her total benefit amount would be $1250 (i.e. $2500/2 - $1056).

So, what I'm saying is that if your wife's own benefit rate if she waits until age 70 to start drawing would be less than half of your full retirement age rate, she'll still end up with a total benefit of 50% of your full retirement age rate as soon as you start drawing. And, if that's the case, she'd be better off to start drawing her own benefits now as opposed to waiting until age 70. As the above example illustrates, drawing $800 monthly for 4+ years would add up to much more than drawing $1056 for the few months from when she turns 70 until you turn 70.

As I said in my original answer, you should strongly consider running the maximization software available on this website. That should help you determine whether or not your wife will benefit from additional earnings from your business, as well as whether or not it would be advantageous for her to wait until age 70 to start drawing her benefits.

Best, Jerry