Next year, the “tax max,” as the Social Security Administration calls it, is set to increase by 7.3%, to $127,200 from $118,500.
This is good news for those policymakers who are concerned about the continuing health of the system. But it may be viewed less favorably by advisory clients, who, like most working people, savor that moment during the year when their take-home wages jump.
In 2010, the maximum amount of taxable earnings for Social Security was $106,800. It increased gradually to $118,500 in 2016, a 9% increase over the course of six years.
It is easy to see why a 7% year-over-year increase warrants attention, and advisers can help ease some clients’ transition. By doing some tax planning with those clients whose adjusted gross income hovers around the new tax maximum, advisers may be able to shift some 2017 earnings into the current year.
If they have already met the Social Security wage maximum in 2016, any further income claimed this year won’t be subject to Social Security tax. Whereas typical tax planning revolves around deferring income and prepaying expenses to reduce the current year’s income for this year, advisers might want to bring in income early and defer expenses so that clients have more taxable income this year than next.
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Advisers must be well-versed in the intricate rules and options that are available.
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The Windfall Elimination Provision may reduce the amount of retirement income clients are expecting.
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Some are better than others, with a few not yet updated for a law that eliminated double dipping.
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Those who are self-employed have the most room to maneuver. Whereas company employees pay half their Social Security tax, with the employer responsible for the other half, the self-employed pay the entire tax themselves, so for them, pushing some extra income into this year might provide a serious tax break.
Business owners can send end-of-year invoices out early and emphasize to clients the importance of paying on time or even offer a special benefit if they pay before Dec. 31. And instead of paying their own bills early, these self-employed clients should wait for the calendar year to turn.
With other clients in the sweet spot, suggest that they avoid the kind of December maneuvers that typically reduce tax liability, such as prepaying January’s mortgage and tax bills, and keep the extra expenses for next year, when they will have more power to reduce tax bills.
Advisers should just run the numbers and make sure that while they are helping clients avoid paying a lot more in Social Security taxes next year, they are saving them more than it will add to their income tax bills.
This story is part of a 30-day series on Social Security.
