9148 / What should dual income households consider with respect to Social Security planning?

One complication that arises in applying the Social Security earnings test applies in cases where both spouses in a marriage have their own independent earnings records upon which Social Security benefits can be based. Further, it is entirely possible that only one spouse will continue to work during retirement, so that uncertainty can arise over whether and when the earnings test will apply to reduce benefits.

Generally, the reduction, or working retirement tax, on Social Security benefits will only apply if the spouse whose earnings record is used to determine the amount of the benefits is also the spouse who continues to work. However, added complications can arise when one spouse decides to file a restricted application (an option that remains even after the phase-out of “file and suspend”, see Q ) in order to cease receiving his or her own benefits and collect half of the other spouse’s available benefit. This strategy can prove useful in situations where it is beneficial to allow the “restricting” spouse’s benefit to grow until he or she reaches age 70.

In this case, the spousal benefit that is received is based on the spouse’s earnings record, so if that spouse continues to work, the earnings test and applicable taxes will apply even though the spouse who is actually collecting the benefits has reached full retirement age (so is no longer subject to the earnings test) and does not work. However, once the working spouse reaches full retirement age, the Social Security Administration recalculates his or her benefits to treat that spouse as though he or she had waited to claim benefits (i.e., if the earnings test results in three months’ worth of lost benefits for three years, the client will be treated as though he or she had begun claiming benefits nine months after the actual claim was made).

With divorced spouses, the continued earnings of a former spouse does not impact the ability of the other ex-spouse to claim benefits based on that working ex-spouse’s earnings record, however.