I have a question about my first required minimum IRA distribution, which I will take this year. This distribution will cause a substantial increase in my federal taxes for the year. I pay my estimated federal taxes quarterly. If I take the entire required minimum distribution in the fourth quarter, may I safely add the related amount of tax to my fourth-quarter estimated payment? Or will the Internal Revenue Service assume that my required minimum distribution was paid evenly throughout the year and seek a penalty?
George LoCascio, Park Ridge, Ill.
Good news: You can probably wait until next April to pay the added tax associated with the first distribution from your individual retirement account. The tax code includes “a break, for the first year, for people whose income shoots up,” said Ed Slott, an accountant in Rockville Centre, N.Y., who is a specialist on IRAs.
Generally, taxpayers who pay too little tax through withholding and/or estimated payments can indeed be hit with underpayment penalties. But there are escape hatches. For instance, you don't face penalties if your withholding and estimated payments add up to at least 90 percent of your total tax obligation for the year.
There's a separate rule when there's a big jump in income: Most such people will be safe this year if their withholding and estimated payments for 2008 add up to at least 100 percent of the total tax they owed for 2007. The threshold is 110 percent for higher-income filers, those with adjusted gross income of $150,000 (or $75,000 if married filing separately).
So, as long as your 2008 estimated payments and any withholding are sufficient based on your lower 2007 taxes, you'll be all right this year.
A year from now, you could factor in your required-minimum-distribution income in setting your 2009 estimated payments. And if you expect to take your IRA distribution in the final months of the year, you could opt to pay the associated tax only in your fourth-quarter estimated payment. (For more on calculating unequal estimated tax payments, see IRS Publication 505, available online at irs.gov.)
But Slott said it would probably be easier to ask your financial institution to withhold an appropriate amount of tax from your IRA distribution.
I am 68 years old and have been collecting Social Security since full retirement age. My wife is 63. When she reaches full retirement age at 66 years, can she collect one-half of my earnings as a spousal benefit and then, at age 70, based on her earnings history, collect an amount which would be larger than the spousal benefit?
William A. Sachs, Laguna Niguel
When your wife reaches full retirement age, she can indeed choose to file for only her spousal benefit and not her earned benefit, said Dorothy Clark, a spokeswoman for the Social Security Administration. In that case, her benefit would generally be half of yours.
Then, by waiting until age 70 to collect on her own work record, she would get “delayed retirement credits.” Those would increase her earned benefit by 32 percent compared with what she could collect at her full retirement age.
In deciding when to file for Social Security, married couples should consider what approach will give them the largest combined benefits over time. One scenario in which this strategy might make sense is if your wife's earned benefit at full retirement age would be slightly below her spousal benefit at that point. With the delayed credits, her earned benefit at age 70 would then exceed the spousal benefit.
Note that individuals younger than full retirement age don't have the option of filing for a spousal benefit without also being deemed to have filed for an earned benefit.
I read that your Average Indexed Monthly Earnings (AIME) figure for Social Security purposes is determined based on your highest-paid 35 years between your 21st birthday and the year of your first eligibility, which is currently 62. Your AIME is then used to determine your benefit based on when you apply.
As one who plans to keep working to 66 or 68, I would welcome my AIME to be calculated with the higher-income years past 62. My income is now exceeding the ceiling for Social Security withholding, which was not the case in prior years. What is the policy of the Social Security Administration?
Daniel C. Noziska, Pleasant Grove, Utah
Your information isn't quite right. Your Social Security retirement benefit will indeed be calculated based on the 35 years in which you had the highest earnings – and years after you turn 62 can certainly be included among the 35.
What gets a little complicated is the way that earnings from early in your career are adjusted to make them comparable to more recent years, and also how, separately, inflation adjustments are applied to your benefit.
In figuring your AIME, eligible earnings for the years up until you turned 60 are indexed to reflect the general increase in U.S. wages over time. For someone who reached 62 in 2007, for example, 1985 earnings of $20,000 would be adjusted up to about $45,800, according to Social Security. There is no indexing for the wages you earn in the years you turn 61 or later ages.
The 35 highest figures are then used to produce your AIME, which in turn is used to figure your benefit. If your current earnings exceed the maximum subject to Social Security withholding ($102,000 in 2008), “those earnings even at face value would certainly be one of your highest 35 years of earnings,” Social Security spokesman Mark Lassiter said.
Finally, cost-of-living adjustments are added to your benefit beginning with the year you turn 62, even if you do not start collecting until full retirement age or later.
For a detailed guide to the benefit calculation, go to socialsecurity.gov, search the site for “Computing a Retired-Worker Benefit” and click on the second item.
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