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The Best Explanation of the Windfall Elimination Provision (2021 Update)

If you have a pension from a job where you did not pay Social Security taxes, your benefit may be reduced by the Windfall Elimination Provision (WEP).

How do you know if you’ll be impacted? Don’t expect it to be on your Social Security benefits statement.

This may surprise you but your Social Security statement does not reflect any reduction in benefits due to this provision. The Social Security Administration will  wait until you file to tell you how much the reduction is if you qualify for both Social Security and a non covered pension.

the windfall elimination provision for teachers, firefighters and police officers

Understanding if a reduction in benefits will apply to you, and how much that will be, does not have to wait until you file for Social Security. You can find out today. It starts by understanding the mechanics of the Windfall Elimination Provision.

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Teacher’s Retirement and Social Security (2021 Update)

Teachers and social security benefits

“Can I get teacher’s retirement and Social Security?”

That’s one of the most commonly asked questions that I see in my Facebook group Social Security WEP & GPO Discussion.

There’s no doubt this can be a complex topic and most of the teachers that I’ve talked to have seen lots of conflicting information — so let’s clear up the confusion and take a closer look at the rules on teacher’s retirement and Social Security.

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What You Should Know About The Government Pension Offset

If you have a pension coming from a government job where you did not pay Social Security tax, you need to know about the Government Pension Offset. Why? If you are affected, it could drastically reduce, or even completely eliminate, your Social Security benefits.

Social Security's Government Pension Offset Unfair

I’ve had more than one client who was shocked to find out they would not receive a spousal or survivor’s benefit due to the Government Pension Offset. It can seem incredibly unfair and can be a nasty surprise. Especially if you’ve been planning your retirement income with this stream of payments calculated in.

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Check Your Social Security Earnings Statement (Before It’s TOO LATE)

If your Social Security earnings have been recorded incorrectly, it could make a big difference in your benefit amount. You need to check for errors yourself — and you need to do it now. Today!

Whether you are close to retirement, or in your early working years, this is something that absolutely cannot wait.

Why the rush? Because the Social Security Administration imposes time limits on correcting your earnings record — even if the mistake on your record is not your fault!

Social Security Earnings Statute of Limitations

Mistakes in the Social Security earnings record are fairly common. For proof, look no further than the Earnings Suspense File. This is where earnings reports with a mismatched name and SSN combination are stored.

Since the inception of Social Security, there have been a total of $1.2 trillion in wages that could not be matched to an earnings record. Because sthey couldn’t be matched, they were added to the Earnings Suspense File. In tax year 2012 alone, the Social Security Administration reported $71 billion added to the file!

Those numbers are astronomically high, which begs the obvious question: why are there so many mistakes within the Social Security earnings records?

Why Mistakes Tend to Happen With Social Security Earnings Records

To be clear, most of these mistakes are not the fault of the Social Security Administration. A good number of the mismatches are due to employer reporting errors or administrative errors that happen when people change names. Others are due to the fraudulent use of Social Security numbers.

The Social Security Administration has a pretty good system for figuring these mistakes out and assigning the earnings to the correct record — but even with their process, nearly half of the mismatches are never corrected.

Unless you’re vigilant about monitoring your earnings record, you could have earnings gaps that could have a substantial impact on your Social Security benefit calculation.

A mistake in your earnings calculation can make a big difference. How? It all goes back to how your benefit is calculated. The Social Security Administration uses your highest 35 years of earnings as a cornerstone of the benefit calculation.

If any of these 35 years are incorrect or missing altogether, the average is skewed. One year of missing earnings can make a big difference in your benefit amount.

Unless you’re vigilant about monitoring your earnings record, you could have earnings gap that could have a substantial impact on your Social Security benefit calculation.

Errors Can Dramatically Affect How Much in Social Security Income You Can Claim

Let me give you an example of how this can affect your benefit amount. For this example, I used the actual online calculator from the Social Security Administration. If you want to follow along, you can just go to the Online Calculator and crunch the numbers for yourself.

In the example calculation I ran, I assumed the following:

A worker has 35 years of earnings that started in 1984 and ended in 2018. Instead of going for a really high annual earnings amount, which would have exaggerate the effect, I assumed that this individual started in 1984 with a salary of $35,000 and had a 2% raise every year.

Under that assumption, this individual would have a full retirement age benefit of $2,418 dollars. That’s the baseline benefit amount we’d expect this person to receive.

But what happens if information is missing from the earnings record? I went back to our calculation and assumed just one year of earnings in 1990 wasn’t included on the worker’s record due to clerical error.

For one missing year, the benefit would decrease to $2,385 dollars. For two missing years, it would decrease to $2,353 dollars. For three, it would be $2,322. For four, it would be $2,291 and for five, it would be $2,260.

That’s a difference of $158 dollars per month.

Whether you are close to retirement, or in your early working years, there is a step that you need to take today. It can’t wait! If you ignore this it could cost you THOUSANDS of dollars in missed Social Security benefits. And its just a small little step that will take less than 5 minutes. I’ll tell you what this mistake is and the steps you need to take TODAY to avoid it. #Mistakes on Earning

Now, you might be thinking, Devin, that doesn’t sound like such a crisis. $158 extra per month would be nice, but that’s not paying for much.

Maybe not when we look at it on a monthly basis. But how would this affect you over your entire retirement?

If we take those same amounts and assume a annual cost of living adjustment of 2%, you’ll see that the effect is now measured by thousands of dollars.

For one year, it’s nearly $8,000 in reduced benefits. For two, it’s over $15,000. For three, it’s slightly over $23,000. At four years, it’s more than $30,000, and at 5 years, it’s nearly $38,000.

I don’t think anyone would willingly give up any of those amounts.

Whether you are close to retirement, or in your early working years, there is a step that you need to take today. It can’t wait! If you ignore this it could cost you THOUSANDS of dollars in missed Social Security benefits. And its just a small little step that will take less than 5 minutes. I’ll tell you what this mistake is and the steps you need to take TODAY to avoid it. #Mistakes on Earning

The Burden of Proof Is on You When Correcting Your Record

If you did look at your earnings record and notice a mistake, the burden is yours to prove it. You might want to start by checking out the SSA’s Request For Correction of Earnings Record form.

You should be prepared to locate documents that prove the error such as tax forms, W-2 forms or pay stubs. If you can’t find these, don’t despair quite yet.

In the SSA manual, the Administration states that an oral or written statement from the employer can serve as primary evidence of wages. Or, the Social Security Administration also says you can take the following steps:

  1. Write down the name and address of your employer
  2. Note the dates you worked there and how much you earned
  3. Provide the name and Social Security number you were using while you were employed

The SSA will then use this information to investigate the problem. But even if they can help you investigate, you still have to remember there’s a time limit to making these corrections.

The Social Security Administration’s Time Limit For Corrections

The Social Security Administration’s language on the time limit for fixing an earnings record is incredibly clear:

“An earnings record can be corrected at any time up to three years, three months, and 15 days after the year in which the wages were paid or the self-employment income was derived.”

How’s that for clarity! Without an exception, you have a little over 3 years to fix earnings record mistakes. Unfortunately, the rules on those exceptions aren’t as clear.

Here’s what the SSA says about the issue:

After the time limit has passed, earnings records can only be revised under the conditions described below and in §1425:

  1. To correct an entry established through fraud;

  2. To correct a mechanical, clerical, or other obvious error;

  3. To correct errors in crediting earnings to the wrong person or to the wrong period;

  4. To transfer items to or from the Railroad Retirement Board (if reported to the wrong agency), or to add railroad earnings to Social Security earnings records when the law permits;

  5. To add wages paid in a period by an employer who made no report of any wages paid to the worker in that period, or if the employer is increasing the originally reported amount for the period;

  6. To add or remove wages in accordance with a wage report filed by the employer with IRS; or, if a State or local governmental employer, with SSA if the report is filed within the time limitation specified for assessment, refund, or credit under a State’s coverage agreement;

  7. To add self-employment income in a taxable year if an individual or the individual’s survivor establishes that:

    1. A self-employment tax return for that year was filed before the time limit ran out; and

    2. Either no self-employment income for that year has been recorded in the individual’s earnings record, or the recorded self-employment income for that year is less than the amount reported on the self-employment tax return; or

  8. To add self-employment income for any taxable year up to the amount of earnings that were wrongly recorded as wages and later deleted. This can be done only if a tax return reporting such self-employment income is filed within three years, three months, and 15 days after the taxable year in which the earnings wrongly recorded as wages were deleted. The self-employment income must:

    1. Be for the same taxable year as the year in which the wages were removed; and

    2. Have already been included on the individual’s Social Security record.

  9. Prior to the expiration of the time limit the worker or the worker’s survivor has:

    1. Applied for benefits and stated that the earnings for a year(s) were incorrect; or

    2. Requested a revision of his or her earnings record for a year(s).

Here’s the boiled down version of the exceptions: The only case where an exception does not apply is when a self employed individual does not file his/her taxes within the time limit.

Like many of the Social Security rules, the rule on time limits are broad and sometimes not completely understood by the technicians at the Social Security Administration. I’ve seen cases where there was a clear exception, but the technician refused to enter the earnings because they did not understand the rule.

Thankfully, this client was able to get help from a financial planner who understood the rules and helped the client draft a request for review letter. A few weeks later, the earnings were back where they should be: on the client’s earnings history.

While that case had a happy ending, it should highlight the importance of not just checking your Social Security earnings report… but making sure you or the right professionals who can help you get the error corrected ASAP.

How to Check Your Social Security Earnings History

Checking your earnings history with the Social Security Administration is easy. You can find the details in your Social Security statement.

(If you’re younger than 60, you only get these every 5 years. For those over 60, you get one every year.)

If you don’t have a recent statement, don’t let that stop you. Go online and instantly print your most recent statement.

To create a My Social Security account, visit www.ssa.gov/myaccount. You’ll need to provide a Social Security number, mailing address and a valid e-mail address. You’ll also need to be able to answer questions that only you are likely to know and it needs to match the information on file with Social Security.

In addition to checking your earnings history, there are many other other reasons to set up your online account. You can:

  • Get an estimate of your future benefits
  • Get a letter with proof of your Social Security benefits
  • Start or change your direct deposit
  • Get a replacement SSA-1099 or SSA-1042S for taxes
  • Change your address

Please, please, please…check your Social Security earnings history today! And don’t stop there. Urge your friends, family members and clients to do the same. Better yet, just share this article!

Ignoring this could cost you thousands of dollars in missed Social Security benefits, whereas checking your record only takes 5 minutes. It’s a worthwhile use of time!

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group. It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. 

You should also consider joining the 100,000+ subscribers on my YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage. 

One last thing that you don’t want to miss: Be sure to get your FREE copy of my Social Security Cheat Sheet. This handy guide takes all of the most important rules from the massive Social Security website and condenses it all down to just one page.

Should Ministers Opt Out of Social Security?

If you are a minister, you have several key tax issues that makes you uniquely different from other taxpayers. These differences include the housing allowance, self-employed treatment for W-2 wage earners and the big one…the ability to opt out of Social Security.

All of these tax differences can create a great deal of complexity, and should only be handled with a team of competent tax and financial advisers. However, the ability to irrevocably opt out of Social Security is probably the most complex financial planning issue for new ministers as it carries a high degree of long-term consequence if the wrong decision is made.
Should Ministers Opt Out of Social Security

If you are a new minister, I know this decision can be complicated. It’s more than just a financial decision.  If you opt out, you must agree to the following language:

I certify that I am conscientiously opposed to, or because of my religious principles I am opposed to, the acceptance of any public insurance that makes payments in the event of death, disability, old age, or retirement; or that makes payments toward the cost of, or provides services for, medical care. 

That’s weighty for sure, but my focus for this article is not to debate the ethical and moral issues of opting out, the good Lord knows there’s already been plenty written about that.   My goal is to examine the economic aspects of opting out.  Specifically, I want to help quantify what it would take to replace the benefits that you’re walking away from.

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Who You Should Talk To At Your Local Social Security Office

I help a lot of people with Social Security. One thing they all have in common is that they’ve called their local Social Security office at least once. Most of these calls have ended in frustration. It doesn’t have to be that way. If you know who to ask for, you’ll get the help you need.

Hierarchy at Social Security officeA decent part of my living comes from consulting with individuals throughout the nation with Social Security issues. For some, it’s simply determining how their filing strategy fits in with their overall retirement plan and making sure they haven’t missed anything. For others, I help solve complex Social Security problems. Many of these people that I help would never call me if they would have received a satisfactory answer and solid advice when they called their local Social Security office. So I may be hurting myself slightly, but I can’t stand to see any more bad (and sometimes non-reversible) decisions made as a result of incorrect guidance from the Social Security Administration. I’m going to tell you who to ask for the next time you call.

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Social Security Benefits for Grandchildren

In 2012 there were 2.7 million grandparents who had primary responsibility for a grandchild under the age of 18, according to a recent US Census Bureau report. Many of these grandparents don’t know that Social Security retirement benefits for dependent grandchildren is a real possibility.

Social Security Benefits for Grandchildren

Retirement doesn’t always go as expected. It hasn’t for the Causey’s. Instead of the frequent traveling they had always planned for their retirement, they are raising their young grandchildren. There’s no sense of burden though, they strongly believe it’s a privilege to have the mental, financial, and physical health that affords them the chance to offer security to their grandchildren. I admire their attitude! I hope that I would feel the same if I were placed in their situation.

Although the Causey’s had a well thought out retirement income plan, they’ve quickly discovered that the extra expense of raising kids will require them to increase their monthly cash flow.

They were surprised when I advised them to file for Social Security benefits immediately. They had always planned to wait until full retirement age to file for benefits, but that all changed when they found out that by filing for their own benefits, they would turn on Social Security benefits to their dependent grandchildren as well.

It’s not one of the more well-known benefits, but under the right conditions grandchildren (or step-grandchildren) can receive a benefit based on the work history of a grandparent.

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Retiring Overseas? Make Sure Your Social Security Benefit Will Follow

Ever dreamed of retiring overseas?

After a life spent in the States, maybe you’d prefer the cultural heritage of Latin America, the sand of the Caribbean or the ancient beauty of Europe. Before you pack your bags, make sure your selected destination is one of the countries where you can still receive your Social Security benefit.

Want to retire overseas? Make sure Social Security will follow

The rules are incredibly complex for those who are eligible for Social Security benefits, but are outside of the United States.  These rules apply not only to those who plan to move, but could apply to someone who was on a missions trip or extended vacation.

For the purposes of this article, we’ll limit our discussion to US citizens who have lived and worked in the United States and decided to retire overseas (or extensively travel) during their retirement years.

The Social Security Administration makes it clear.  If you are a US citizen, you can receive your Social Security benefits if you are outside of the United States.  As you may suspect, there are some stipulations.

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Tax on Social Security Benefits

Social Security Tax

Just how much you owe in tax on Social Security benefits can be a huge shock if you’re unprepared.

I vividly remember the fact that the amount of tax on Social Security benefits was one of my Dad’s biggest retirement surprises.

He didn’t expect to pay so much in taxes, so in his first year of retirement (and first year claiming his benefits) it came as a nasty surprise when he found out that up to 85% of his Social Security benefit could be counted as taxable income!

My dad wasn’t alone. A lot of retirees have no idea of the big tax bill that could be waiting for them in their first spring after retirement.

What to Expect from Taxes on Social Security Income

Ultimately, in my dad’s situation, we were able to mitigate some of his tax burden. But for a good part of it, he was stuck.

As you can imagine, he didn’t like this one bit. And you might not either if you find yourself in the same position.

Every year individuals retire and are faced with sticker shock when they find out how much they’ll have to pay in taxes on Social Security income.

To some, it doesn’t seem fair. You’ve worked for years and paid your Social Security tax as the admission ticket to a Social Security benefit.

Now that you’re collecting that benefit, you have to pay taxes? Again?

Taxes on Social Security Income Are a Relatively New Thing

At first, Social Security benefits were not taxable. That all changed with the passage of 1983 Amendments to the Social Security Act.

Under this new rule, up to 50% of Social Security benefits became taxable for certain individuals. 10 years later, the Deficit Reduction Act of 1993 expanded the taxation of Social Security benefits.

Under this Act, an additional bracket was added where up to 85% of Social Security benefits could be taxable above certain thresholds.

The combination of these laws left us with the current tax structure on Social Security benefits. Today, somewhere between 0% and 85% of your Social Security payment will be included as taxable income.

Since those brackets have been added, they’ve never been changed! As far as I know, there are no plans to change them in the future. This means that as the general income levels rise, more individuals will be subject to taxation on their social security benefits.

For proof of this, look at what’s already happened. Since taxes on SS benefits were introduced, the revenue coming in from these taxes have skyrocketed. Here’s an example: In 2008, taxes were slightly above 15 billion dollars. In 2017, this amount was 130% higher!

How to Know How Much of Your Benefit Is Subject to Taxes

In order to determine how much of your Social Security benefits will be taxable, you first have to calculate “combined income.”

I’m not a tax professional, but to my knowledge, the only place this term is found is when it relates to Social Security benefits. It’s a formula by which the IRS determines how much of those benefits you receive should be included as ordinary income on your tax return.

Combined income can be roughly calculated as your total income from taxable sources, plus any tax-exempt interest (such as interest from tax free bonds), plus any excluded foreign income, plus 50% of your Social Security benefits.  

Social Security Tax Provisional Income

Once you’ve calculated your “combined income” you can apply it to the threshold tables to determine what percentage of your Social Security will be included as taxable income.

If your total “combined income” is less than $32,000 (or $25,000 if you’re single), none of your Social Security benefits will be taxable.

However, if you are married and your total combined income exceeds $32,000 (and $25,000 for singles), then 50% of the excess is the amount of Social Security benefits that must be included in taxable income.

If your combined income exceeds $44,000 (or $34,000 for singles), then 85% of the excess amount is included in income. 

Social Security Provisional Income Threshholds

An Example of How Combined Income Calculations Work

That can seem really confusing when we’re just talking about things in theory. Let’s look at a more tangible example so you can better understand how taxes on Social Security benefits are calculated.

Imagine that Tim and Donna have recently retired. They have some rental property that generally averages $12,000 in net annual income.

Their combined Social Security benefit will be $3,000 per month, which equals $36,000 per year. In addition to this income, they will take an annual distribution from their IRA in the amount of $32,000.

Retirement Income and Calculating Provisional Income

Using the income from those sources, here’s how the combined income would be calculated — and remember that only half of the Social Security income is counted in the calculation:

Social Security Provisional Income Calculation

From this, we can see that Tim and Donna have $62,000 worth of combined income. From here, we can see how much of their Social Security benefit is taxable.

How Your Combined Income Impacts the Tax You Pay on Social Security Benefits

Based on a married couple with a combined income of $62,000, we can return to the thresholds to determine how much in tax on Social Security benefits they might fact.

The first $32,000 of combined income has no impact on whether or not a Social Security benefit is taxable. 50% of the amounts between $32,000 and $44,000 will be added and then 85% of the amount in excess of $44,000 will be added.

As a rough calculation, a married couple with a combined income of $62,000 would have about $21,300 of taxable Social Security income:

dollar amount of Social Security income that is taxable

Since you can only spend the dollars you keep, you need to be familiar with the rules about when and how much you may pay in taxes on Social Security benefits.

You don’t have to be a tax expert; I know I’m not. But I do understand enough to know how to roughly calculate the amount of tax on Social Security benefits — and you should too.

If you need to dig deeper and get specific advice on your situation, please consult your tax advisor or CPA.

Need More Information on Social Security?

If you still have questions, you could leave a comment below, but what may be an even greater help is to join my FREE Facebook members group.

It’s very active and has some really smart people who love to answer any questions you may have about Social Security. From time to time I’ll even drop in to add my thoughts, too. 

You should also consider joining the 326,000+ subscribers on my YouTube channel! For visual learners (as most of us are), this is where I break down the complex rules and help you figure out how to use them to your advantage. 

One last thing that you don’t want to miss: Be sure to get your FREE copy of my Social Security Cheat Sheet. This handy guide takes all of the most important rules from the massive Social Security website and condenses it all down to just one page.