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  • Writer's pictureDavid Peters

Accountable Blog for Pros - 6/25/2023

Getting Through a Client Meeting on Social Security Benefits



By David Peters, CPA, CFP, CLU, CPCU


Social Security is an oddball for many practitioners. In one form or another, Social Security plays a part in nearly every American’s retirement planning. It has been around since 1935. While there have been inflation adjustments, additions, and several changes to the system, the mechanics of how to calculate retirement benefits really have not changed that much in recent memory. In short, you would think that most practitioners would look at Social Security as something that is very familiar, tried and true, and well…. easy.


For many financial advisors and tax preparers though, the opposite is true. When we talk to clients about Social Security, it makes us nervous. We wonder about all the loopholes and strategies that we feel like we don’t know. Some of the best tax practitioners I know have told me how they felt entirely comfortable with the seemingly endless IRS notices, Revenue Procedures, and Letter Rulings that come out every year - yet they outsource any questions on Social Security! Simply put, Social Security is intimidating for a lot of us – even if we feel good about most other things in the world of tax.


Let me be clear…. Social Security is intimidating because it is complicated. There are a lot of rules. There are a lot of nuances. No doubt about it. As a practitioner, you should never give advice in an area you don’t feel confident in. To become an expert in Social Security planning takes time, effort, and dedicated study. It is not a small undertaking.

However, in my experience, many clients really just want to know the basics (at least to start with). They want to know how much they are going to get and how they can increase this amount. They also want to know how Social Security is taxed. Advanced planning strategies may come into play later, but normally the first few questions on their mind are pretty standard – and those basics are well within our reach.


With that in mind, let’s explore some common questions that clients typically ask about Social Security. While these won’t cover everything, they can help us get through many meetings feeling more confident that we have provided some value to the client.


1. How much is my benefit going to be?


This is usually the first question out of most clients’ mouth. This is the one people care about the most, because it helps them understand what their standard of living is going to be in retirement. If the client is looking for an exact dollar amount, have them login into their account on Social Security Administration website (www.ssa.gov) and they can see an estimate of what their benefit will be at retirement (assuming they claim benefits at the full retirement age). It is quick, easy, accurate – and the best part is that you don’t even have to put pen to paper! Just remember that clients should always login for themselves. Pointing them to the website where they can login themselves is helpful. On the other hand, you logging in for them is putting yourself at risk.


The Social Security monthly benefit amount is derived from a three-step calculation:


1. The top 35 years of earnings are used to compute the worker’s Average Indexed Monthly Earnings (AIME)


2. AIME is plugged into an inflation indexed formula to derive the Primary Insurance Amount (PIA)


3. The PIA may then be adjusted up or down depending on the circumstances of the worker. For example, if the worker retires before their full retirement age, then the PIA will be adjusted down. If they wait to claim, then the PIA may be adjusted up.


I have often had more mathematically-inclined practitioners want to calculate the benefits for their clients themselves. While I think it is good to understand how the calculation works in broad strokes, I tend to tell most practitioners not to bother with that level of detail. It is important for clients to make sure that the Social Security Office’s earnings records are accurate. Any income that is subject to Social Security taxes (essentially wages and self-employment income) should appear on the earnings record of the client. Also, don’t forget that Social Security is subject to an upper limit every year. For example, the wage base limit for Social Security in 2023 is $160,200. Therefore, the most that anyone will get to put into the AIME calculation for the 2023 tax year is $160,200. Spending time helping the client make sure their earnings record is correct is time well spent. Cranking through the details of the calculation may not be.


2. How can I increase my benefit?


As can be seen from the three-step formula described above, the main input into the benefits formula is the top 35 earnings years (up to Social Security wage limit). So for a client who has not reached the Social Security wage base, they may be able to achieve a higher benefit by simply having a higher earnings year replacing a lower earnings year. This is an especially important concept for small business owners who often have more control over their salary than others. S-Corporation shareholder/owners often take a lower salary in order to avoid payroll taxes. As long as they are still taking a reasonable amount of compensation, this strategy is generally permissible. The problem is that taking a lower salary creates lower earnings years – and therefore reduces AIME. In short, if you don’t pay into the Social Security system, you don’t get the benefits from it. Small business owners should consider the benefits of reduced payroll taxes versus the advantages of a higher Social Security retirement benefit.


When discussing how to maximize benefits with a client, it is important to also discuss the impact of retiring early. In order to qualify for the full amount of retirement benefits, a client must work for at least 10 years (to obtain the maximum 40 quarterly credits). This is normally a pretty low bar for most people.


The more problematic hurdle tends to be taking benefits early. The full retirement age for any worker born 1960 or later is currently 67 years old. However, Social Security retirement benefits may generally be claimed by a worker as early as age 62. If the worker claims at their full retirement age, they will receive 100% of their PIA. If they claim before this, they will receive something less.


The amount of the decrease will depend how early the worker retires. The Social Security Administration reduces a client’s monthly benefit by 5/9 of 1% per month for each of the first 36 months they file for benefits before full retirement age. For each month beyond 36 months early, the reduction is 5/12 of 1%. For those of you that may be tempted to pull out the calculator at this point, let’s try to make that a bit easier. If your client’s full retirement age is 67 and they retire at age 62, the formula works out so that they would receive approximately 70% of their PIA.


Conversely, clients will receive an additional 8% per year (2/3 of 1% per month) if they wait to claim benefits until after their full retirement age. The longest they can wait is until age 70. If we again assume a full retirement age of 67, the worker could receive 124% of his/her PIA by waiting until age 70 to claim. To recap for a worker with a full retirement age of 67:

· Claim at 62: 70% of PIA

· Claim at 67: 100% of PIA

· Claim at 70: 124% of PIA


3. Will I get taxed on Social Security benefits?


At the federal level, Social Security benefits are generally taxable. The good news is that no one ever gets taxed on the full amount of their benefits. At most, a client will get taxed on 85% of their benefits, but there is a chance that only 50% or even none of their benefits could get taxed. This depends on their provisional income, which is made up of tax-exempt interest, Modified Adjusted Gross Income (MAGI), and 50% of Social Security benefits. The key thing to remember here is that if you have a client who is NOT in the 85% bucket, try to help them avoid one-time hits in income. For example, if a client who normally only has 50% of their benefits taxed has a large capital gain in a particular year, it may push them into having 85% of their benefits being taxed. This additional Social Security being pulled into gross income can effectively make it so a capital gain can have much bigger tax impact than may initially be apparent!


Arguably the more important tax issues for Social Security are at the state level. While many states do not include Social Security benefits in their calculation of taxable income, this is not true across the board. For example, New Mexico does include Social Security benefits in gross income, but indirectly offsets part of this income with a retirement income deduction. Utah also taxes Social Security benefits, but uses a credit system to eliminate the liability for certain lower income taxpayers. Other states, like Colorado, Minnesota, North Dakota, and others, use factors like age and income levels to modify how much of Social Security is taxable. At the time of this writing, the following states do not tax Social Security benefits (or do not have an income tax): AK, AL, AZ, AR, CA, DE, DC, FL, GA, HI, ID, IL, IN, IA, KY, LA, ME, MD, MA, MI, MS, NH, NJ, NV, NY, NC, OH, OK, OR, PA, SC, SD, TN, TX, VA, WA, WI, WY.


The point here is simple - be careful at the state level. Like most things with multistate income tax, it is important to remember that there are very few universal rules!


Being Helpful on the Basics


Are these all of the questions a client will ever ask about Social Security? Certainly not. The above list is not meant to encompass every question a client will have. If a client wants to go deeper on spousal benefits, claiming based on a deceased worker, or even disability benefits, you may have to call in a specialist. There are lots of details when it comes to Social Security that are hard to master - and not every client situation is the same. However, what should be clear from the discussion above is that you can provide value to clients and help with some basic questions without having the Social Security Administration’s website memorized. Most clients want to know the same things. If you can at least answer some initial questions for them, you will give them some comfort heading into retirement.


Required Disclosure:


This is not specific investment advice.


Financial and Investment Advisory services offered through CFO Capital Management. Brokerage and Custodial Services offered through TD Ameritrade Institutional, member FINRA and SIPC. CFO-CM and TDA are not affiliated. Tax services are provided by Peters Tax Preparation & Consulting, PC and are not provided by CFO Capital Management.




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