Money matters | Year-end moves to save on taxes, plan for Social Security changes

Ira Fateman is a certified financial planner in San Francisco who also teaches workshops at S.F. State’s College of Extended Learning. His next workshop is Jan. 16. Contact him at ira@sasadvisors.com or (415) 277-5955.

“We’re confused,” Pam and Ginger said simultaneously during a recent phone call to go over their financial plan. “We hear there are changes to Social Security, but we don’t know what they mean.”

I urged the couple not to worry, explaining that Social Security will still be there for them. However, some claiming strategies that many people don’t know about will be disappearing soon, most notably:

• Claim and suspend: This strategy lets Spouse A, who is not yet 70 but eligible for full retirement-age benefits, receive a partial Social Security benefit based on Spouse B’s full retirement-age benefit — when Spouse B claims and immediately suspends receiving benefits. Upon reaching age 70, both spouses each receive their full benefit. For those already utilizing “claim and suspend” based on existing law, nothing will change. But for those turning 66 after April 30, 2016, this strategy will no longer be available.

• Restricted application for spousal benefits: This also disappears for anyone turning 62 after Dec. 31, 2015. After this date, all applicants for Social Security benefits will only be able to collect the highest benefit available to them. Also, no benefit will be available based on any other beneficiary unless that beneficiary is actively collecting benefits.

Ginger cleared her throat. The phone line went silent. Finally, Pam said, “It sounds complicated.”

“Yes and no,” I answered.

I explained the options to Pam, who is 62, and Ginger, who turns 66 in January.

The main concept behind “claim and suspend” is that you sacrifice some Social Security income now for higher income later. Two key action items should be noted for anyone considering this strategy:

First, if your spouse turns 66 by April 30 and you plan to use a “claim and suspend” strategy, go right ahead. All benefits based on your spouse’s benefit are triggered subject to current rules.

Make your appointment with Social Security as soon as you can. Your spouse can file a restricted application and will be eligible or not based on current rules. Then your spouse potentially can wait until 70 to collect his or her own benefit. The spouse claiming can suspend actual receipt of benefits up to age 70 to receive the higher (up to 32 percent) distribution.

Second, if one spouse or both turn 62 by April 30, you can use a restricted application for the spousal benefit, but only if your spouse actually collects benefits. If you suspend your benefits, your spousal benefit also stops, as well as any other benefits based on yours.

And while considering Social Security options, don’t forget about your 2015 income taxes. While taxes are due by April 15, the tax year ends Dec. 31. There’s not much time left, but you can still consider several tax-saving opportunities:

• Making IRA charitable transfers for investors over 70½. Congress hasn’t yet approved this, but approval — possibly retroactive — is expected. Individuals will be able to make a charitable donation of their required minimum distribution without the withdrawal being taxed. However, no charitable deduction will be allowed.

• Taking losses on equities you no longer find productive. Sell now, take the deduction and reinvest in something more promising.

• Making charitable donations to either your donor-advised fund or in cash to chosen charities. If possible, use appreciated assets.

• Accelerating deductions and delaying income, if possible.

• Being careful about buying mutual fund shares. This time of year, funds make taxable distributions regardless of how long you hold shares. If distributions have been made already, then buy.

• Converting traditional IRA/401k funds to Roth IRAs — if you file a Schedule A itemizing deductions greater than your taxable income. This will generate extra income up to the amount of unused itemized deductions. Remember, IRA conversions are based on the calendar year.

• Spending down any flexible saving accounts held with your employer.

• Taking advantage of the annual gift exclusion maximum of $14,000. You can also give appreciated securities up to the same limit.

“So much to think about,” said Pam.

She’s right. But heeding Social Security changes and taking advantage of even one tax opportunity can make or save you quite a bit of money

Ira Fateman

Ira Fateman is a certified financial planner at SAS Financial Advisors in San Francisco. He can be reached at (415) 277-5955 or ira@sasadvisors.com.