What is the Buzz About? Are people who retired at age 62, really thinking about withdrawing their claim? Is it smart to pay back all of your Social Security benefits received since age 62 to get a higher monthly benefit at age 70?

There definitely are times when you need to withdraw a prior claim to file a new claim, but you should not take withdrawing your retirement claim lightly. It is a very important decision and there are many things to take into consideration. Such as tax obligations, the amount of the increase, and the length of time it will take to recoup the money repaid.

Here is a scenario of a person who retired at age 62, withdraws his claim at age 70 and files a new claim.

Tom retires at age 62 and receives a monthly benefit of $1,000.00. This is 75% of his $1,334.00 full retirement benefit amount due to 47 reduction months. His monthly benefit of $1000.00 grows to $1,228.00 by age 70 assuming a 3% cost of living increase each year. Social Security paid him a total of $106,620.00 in benefits from age 62 to age 70.

When Tom withdraws his claim at age 70, he must repay $106,620 to Social Security. In return, Social Security will pay him beginning at age 70 an unreduced benefit with delayed retirement credits at 8% a year. His new monthly benefit amount at age 70 will be $2,042.00. This is a monthly increase of $814.00.

If Tom’s total taxable earnings, including one-half of his Social Security benefit each year is over $25,000, he pays tax on his Social Security benefits. Tom may or may not have a tax obligation on his Social Security benefits received in the year he makes the repayment. If Tom’s 1099 issued by Social Security shows a negative amount, he will use the instructions below from IRS Publication 915. The publication will help Tom determine what amount of his Social Security benefit is taxable.

Tom paid tax on 85% of his Social Security benefits for each year he received benefits. At a tax rate of 25%, his tax on Social Security benefits each year averages about $2,832.00, times 8 years, equals $22,656.00. Tom actually makes a repayment of $106,620 to Social Security and has already paid $22,656.00 in taxes on the benefits to the Internal Revenue. Tom pays a total of $129,276.00.

The total of $129,276.00 divided by the increase of $812.00 equals 159 months or 13 years. Tom is 83 years of age when he breaks even if he lives that long. In addition, Internal Revenue will again collect tax when Social Security benefits begin. Remember, IRS taxed this money the first time Social Security paid the benefits.

Any spouse or child receiving benefits on Tom’s record must also repay the benefits they received. If the others do not agree to repay their benefits, Social Security would not allow Tom to withdraw his claim.

Think about it . . . The fact that Social Security allows a withdrawal of a claim and repayment of benefits might be their way of trying to save the trust fund rather than putting money back in your pocket.

By Darlene Oldendick

IRS Publication 915 Repayments More Than Gross Benefits

In some situations, your Form SSA-1099 or Form RRB-1099 will show that the total benefits you repaid (box 4) are more than the gross benefits (box 3) you received. If this occurred, your net benefits in box 5 will be a negative figure (a figure in parentheses) and none of your benefits will be taxable. Do not use Worksheet 1 in this case. If you receive more than one form, a negative figure in box 5 of one form is used to offset a positive figure in box 5 of another form for that same year.

Repayment of benefits received in an earlier year. If the total amount shown in box 5 of all of your Forms SSA-1099 and RRB-1099 is a negative figure, you can take an itemized deduction for the part of this negative figure that represents benefits you included in gross income in an earlier year.

Deduction $3,000 or less

If this deduction is $3,000 or less, it is subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions. Claim it on Schedule A (Form 1040), line 23.

Deduction more than $3,000

If this deduction is more than $3,000, you should figure your tax two ways:

1. Figure your tax for 2007 with the itemized deduction included on Schedule A, line 28.

2. Figure your tax for 2007 in the following steps:

a. Figure the tax without the itemized deduction included on Schedule A, line 28.

b. For each year after 1983 for which part of the negative figure represents a repayment of benefits, refigure your taxable benefits as if your total benefits for the year were reduced by that part of the negative figure. Then refigure the tax for that year.

c. Subtract the total of the refigured tax amounts in (b) from the total of your actual tax amounts.

d. Subtract the result in (c) from the result in (a).

Compare the tax figured in methods (1) and (2). Your tax for 2007 is the smaller of the two amounts. If method (1) results in less tax, take the itemized deduction on Schedule A (Form 1040), line 28. If method (2) results in less tax, claim a credit for the amount from step 2(c) above on Form 1040, line 70, and write “I.R.C. 1341” in the margin to the left of line 70. If both methods produce the same tax, deduct the repayment on Schedule A (Form 1040), line 28.