Garland Law Offices, P.A.

Locking in a Deceased Spouse’s Unused Federal Estate Tax Exemption

“If you have lost your spouse during this time, there are so many issues you must address–funeral arrangements, meeting with lawyers and accountants and dealing with finances. All of this comes on top of dealing with the emotional loss.”

So many people have died during the COVID crisis, and many are coping with the death of a spouse, one of life’s biggest challenges. Among the details that need to be taken care of is locking in the deceased spouse’s unused federal estate tax exemption, says a recent article from Forbes titled “4 Things You Should Know About The Death Tax Exemption.”

The deceased spouse unused exemption (DSUE) is the amount of federal estate tax exemption the spouse’s estate did not use up. When a person dies, a federal estate tax, known also as the “death” tax, is imposed on any assets over a certain amount. The estate tax exemption amount covers the assets that fall below that amount.

The threshold has changed over the years, and today is at a historically high level of $11,580,000. This is likely to change in the future, as the federal government needs to pay for COVID-related costs. For now, this level is scheduled to increase every year until 2026, when it will drop to $5 million (adjusted for inflation). But it may drop sooner.

The DSUE is locked in when you file your deceased spouses’ estate tax return, due nine (9) months after the date of death. If a spouse died in 2020 with the current exemption of $11,580,000 in place and used up $6,580,000 of the exemption amount, the surviving spouse will be able to add $5,000,000 to their exemption amount.

The surviving spouse would then have their own $11,580,000 exemption, plus the $5,000,000 from the deceased spouse’s exemptions. For high net worth families, this is an exceptionally beneficial tax option.

Here’s an important note: even if a spouse leaves all of their assets to their spouse and no federal estate taxes are due, an estate tax still needs to be filed if the surviving spouse is to lock in the DSUE. If the surviving spouse does not file an estate tax return in a timely fashion, the DSUE will be lost. The estate tax savings to the heirs could be in the millions.

If the estate tax exemption drops to prior levels, let’s say $3,500,000, the family will still be able to claim the DSUE when the second spouse dies. This could be a big help for heirs in reducing or eliminating taxes on the second spouse’s estate. Many people may not have an estate worth $11 million, but by adding up the value of a home, retirement accounts, life insurance and other assets, a $5 million level of assets is not unheard of.

There will also be state estate taxes, depending upon where a family lives. They will need to be considered in administering the spouse’s estate and filing a return as well.

Your estate planning attorney will be able to analyze the federal and state estate taxes to achieve the best possible outcome for you and your spouse.

Reference: Forbes (Aug. 17, 2020) “4 Things You Should Know About The Death Tax Exemption”

Gifting Can Help Estate Plans and Heirs Reach Goals

“Despite many attempts at repeal over the years, the modern U.S. Estate Tax has been in place since September 8, 1916. Each U.S. citizen and resident alien is entitled to a lifetime exemption from the federal Gift/Estate Tax called the Applicable Exclusion Amount.”

The applicable exclusion amount for gift/estate tax purposes is $11.58 million in 2020, a level that makes incorporating gifting into estate plans very attractive for high net-worth families. If a donor’s taxable gift—one that does not qualify for the annual, medical or education exclusion—is in excess of this amount, or if the value of the donor’s aggregate taxable gifts is higher than this amount, the federal gift tax will be due by April 15 of the following year. The current gift tax rate is 40%.

This presents an opportunity, as described in detail in the article “The Case for Gifting Now (or At Least Planning for the Possibility” from The National Law Review.

If the exclusion is used during one’s lifetime, it reduces the amount of the exemption available at death to shelter property from the estate tax. With proper planning, spouses may currently gift or die with assets totally as much as $23.16 million, with no gift or federal estate tax.

To gain perspective on how high this exclusion is, in 2000-2001, the applicable exclusion amount was $675,000.

The exclusion amount will automatically decrease to approximately $6.5 million on January 1, 2026, unless changes are made by Congress before that time to continue the current exclusion amount. Now is a good time to have a conversation with your estate planning attorney about making gifts in advance of the scheduled decrease and/or any changes that may occur in the future. The following are reasons why this exemption may be lowered:

• Trillions of dollars in federal stimulus spending necessitated by the COVID-19 pandemic and the severe economic downturn in the U.S.
• Past precedent of passing tax legislation mid-year and applying it retroactively to January 1.
• A possible change in party control for the presidency and/or the Senate
• The use of the budget reconciliation process to pass changes to taxes.

In the 100-plus year history of the estate tax, the exemption has never gone down. However, the exemption has also never been this high. The possibility of a compressed timeframe for family business owners and wealthy individuals to implement lifetime gifts before any legislative change may make a tidal wave of gifting transactions challenging between now and December 31, 2020. Now is the time to start planning and take action to utilize the exclusion amount.

Reference: The National Review (Aug. 20, 2020) “The Case for Gifting Now (or At Least Planning for the Possibility”

What COVID-19 Does to Roth Conversions

“Has the Covid-19 stock market volatility caused your retirement accounts to decline? Will the temporary suspension of required minimum distributions (RMD) or a reduction in your compensation lower your 2020 tax liability?”

With a combination of lowered 2020 tax liability, the potential for future tax increases and potentially lower portfolio values, we are in uncharted financial waters. However, all of these factors may make a Roth conversion more attractive than ever, according to the article “Covid-19 and the CARES Act enhance the Roth conversion game” from the Jacksonville Business Journal.

A quick look first at essentials of the traditional and Roth IRAs:

Tradition IRA contributions are tax deductible.

• Growth inside the account is tax-deferred,
• Qualified distributions are taxed as ordinary income, and
• Required minimum distributions must begin at age 72.

Roth IRA contributions are not tax deductible.

• Growth inside the account is tax free,
• Qualified distributions are tax free, and
• There are no required minimum distributions.

Roth IRAs are an essential part of both estate and retirement planning. Converting a traditional IRA to a Roth IRA lets you decide when you or your beneficiaries pay taxes. Convert all of your IRA to a Roth, and pay the taxes up front, based on the year the conversion is made. If you have a low-income year, and the value of your IRAs is low, that’s the time to do the conversion.

Just be mindful that making this move for a large amount of money could potentially move you into a higher tax bracket. Being strategic and moving a portion of your IRA could make more sense, especially if you expect that you’ll be in a higher tax bracket during retirement, or if you anticipate that your ultimate beneficiary may be in a higher tax bracket within ten years following their inheritance. (As a result of the SECURE Act, inherited IRA accounts must be emptied within ten years after they are received.)

You’ll also need a plan to pay the taxes on that conversion. In a perfect world, those taxes would be paid from funds outside of your retirement accounts. If the only way to pay this tax is by using funds from your IRA, you can have the funds withheld during the conversion. Be sure to run the numbers before doing the conversion. If you pull money from your IRA account to do the conversion, there will be less money to grow long-term for you, and it will be included in your taxable income for the year.

We all like something for nothing, but there are costs to Roth conversions. The five-year rule requires that a Roth needs to exist for five years, before you can take out money tax free. You’ll need to be sure that you have enough cash on hand to live on for five years after the conversion. However, that’s not all. There are a number of different variations on the five-year rule, depending on your situation. If you are under age 59½ and take a distribution of profits before the five years, you will get hit with a 10% penalty without an allowable exception on the amount you converted. An experienced estate planning attorney will be able to help you make a strategically sound decision.

Reference: Jacksonville Business Journal (July 13, 2020) “Covid-19 and the CARES Act enhance the Roth conversion game”

That Last Step: Trust Funding

“If you have updated your estate plan during the Covid crisis and even found a way to sign your documents while maintaining social distance, do not overlook the last step of trust funding.”

Neglecting to fund trusts is a surprisingly common mistake, and one that can undo the best estate and tax plans. Many people put it on the back burner, then forget about it, says the article “Don’t Overlook Your Trust Funding” from Forbes.

Done properly, trust funding helps avoid probate, provides for you and your family in the event of incapacity and helps save on estate taxes.

Creating a revocable trust gives you control. With a revocable trust, you can make changes to the trust while you are living, including funding. Think of a trust like an empty box—you can put assets in it now, or after you pass. If you transfer assets to the trust now, however, your executor won’t have to do it when you die.

Note that if you don’t put assets in the trust while you are living, those assets will go through the probate process. While the executor will have the authority to transfer assets, they’ll have to get court approval. That takes time and costs money. It is best to do it while you are living.

A trust helps if you become incapacitated. You may be managing the trust while you are living, but what happens if you die or become too sick to manage your own affairs? If the trust is funded and a successor trustee has been named, the successor trustee will be able to manage your assets and take care of you and your family. If the successor trustee has control of an empty, unfunded trust, a conservatorship may need to be appointed by the court to oversee assets.

There’s a tax benefit to trusts. For married people, trusts are often created that contain provisions for estate tax savings that defer estate taxes until the death of the second spouse. Income is provided to the surviving spouse and access to the principal during their lifetime. The children are usually the ultimate beneficiaries. However, the trust won’t work if it’s empty.

Depending on where you live, a trust may benefit you with regard to state estate taxes. Putting money in the trust takes it out of your taxable estate. You’ll need to work with an estate planning attorney to ensure that the assets are properly structured. For instance, if your assets are owned jointly with your spouse, they will not pass into a trust at your death and won’t be outside of your taxable estate.

Move the right assets to the right trust. It’s very important that any assets you transfer to the trust are aligned with your estate plan. Taxable brokerage accounts, bank accounts and real estate are usually transferred into a trust. Some tangible assets may be transferred into the trust, as well as any stocks from a family business or interests in a limited liability company. Your estate planning attorney, financial advisor and insurance broker should be consulted to avoid making expensive mistakes.

You’ve worked hard to accumulate assets and protecting them with a trust is a good idea. Just don’t forget the final step of funding the trust.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

Social Security and Medicare and the Impact on Retiree Taxes

“Medicare has a series of income limits that trigger increasingly higher payments for retirees. And it’s not just the rich who are affected.”

A 70% increase in Medicare premiums to $559 was a complete surprise to a woman who became a single taxpayer when her husband died. She felt like she was being punished for being a widow, she said in a recent article titled “Retirees, Beware These Tax Torpedoes” from Barron’s. With a 2018 modified adjusted gross income of $163,414, a combination of required minimum distributions, Social Security and her husband’s pensions, she went from being in the third-highest Medicare bracket into the second highest Medicare bracket. All it took was $414 dollars to exceed the $163,000 limit.

This is not the only tax trap awaiting unwary retirees. Lower- and middle-income taxpayers get hit by what’s commonly referred to as “tax torpedoes,” as rising income during retirement triggers new taxes. That includes Social Security income, which is taxed after reaching a certain limit. The resulting marginal tax rate—as high as 40.8%—is made worse by a Medicare surtax of 0.9% on couples with taxable income exceeding $250,000. Capital gains taxes also increase, as income rises.

It may be too late to make changes for this tax-filing year, even with a three-month extension to July 15. However, there are a few steps that retirees can take to avoid or minimize these taxes for next year. The simplest one: delay spending from one year to the next and be extra careful about taking funds from after-tax accounts.

What hurts most is if you’re on the borderline of a bracket. Just one wrong move, like selling a stock or taking a distribution, puts you into the next bracket. You need to plan carefully.

One thing that won’t be a concern for 2020 taxes: required minimum distributions. While many retirees get pushed into tax traps because of taking large RMDs, the emergency legislation passed in response to the coronavirus crisis (the CARES Act) eliminated RMDs for this year.

However, the RMDs will be back in 2021, so now is a good time to start thinking about how to avoid any of the typical tax torpedoes. RMDs used to start at age 70½; the SECURE Act changed that to 72.

If you don’t need the money from an RMD in 2021, one workaround is to take it as a qualified charitable distribution. That avoids triggering higher taxes or higher future Medicare premiums. The administrator of the tax-deferred account needs to be instructed to make a donation directly to a charity.

An even better strategy: take steps long before Medicare income limits or tax torpedoes hit. If you can, live on after-tax savings, Roth IRA accounts or inherited money. Spend that money first, before tapping into tax-deferred accounts. You can then take advantage of being in a lower tax bracket to convert money from tax-deferred money to convert to Roth IRAs.

Another story of a tax hit that was avoided: a man with an income of about $80,000 prepared to take $4,000 from a tax-deferred account for a vacation. The couple’s normal top tax bracket was 12%, but they hit the income limit on Social Security taxes. The $4,000 in additional income would have caused $3,400 in Social Security income to be taxed, making his marginal tax rate 22.2% instead of 12%. With the help of a good advisor, the couple instead took $3,000 from a Roth IRA and sold a stock position for $1,000, where there were practically no capital gains generated.

Incomes at all levels can be hit by these tax and Medicare torpedoes. A skilled advisor can help protect your retirement and Social Security funds.

Reference: Barron’s (July 6, 2020) “Retirees, Beware These Tax Torpedoes”

Don’t Shrink Your Estate with Last Minute Tax Planning

“Estate planning strategies such as family limited partnerships and gifts to charitable trusts are part of an estate planning professional’s toolbox to achieve client goals, such as minimizing taxes, effectuating philanthropic plans, teaching younger generations about a family business and passing on wealth.”

In the best-case scenario, you’d start talking with your estate planning attorney early on about your overall goals and the various tools available to minimize tax liability and transfer wealth to the next generation. Whether your estate is modest or significant, the article “A Recipe for Risk—Last-Minute Tax Planning for Estates” from The Legal Intelligencer explains how a last-minute plan failed on a grand scale. A recent memorandum opinion from the U.S. Tax Court provides a cautionary tale.

Howard Moore owned a large amount of property and ran a successful farm. He was admitted to the hospital late in 2004, was discharged to hospice and told he only had six months to live. He created an estate plan that included a family limited partnership (FLP), a living trust, a charitable lead annuity trust, a trust for the adult children, a management trust that acted as the general partner of the family limited partnership and an “Irrevocable Trust No. 1” that was created to act as a conduit for the transfer of funds from the FLP to a charitable foundation.

The primary focus of the plan was to transfer the farm to a living trust and then to transfer 80% of the farm property to the FLP. The management trust was to serve as a partner to the FLP, with the living trust owning almost all the limited partnership interests and with each of the decedent’s children owning a 1% partnership interest. The FLP was to offer protection against liabilities from the use of pesticides, potential bad marriages, creditors and the fact that the family was a bit dysfunctional and would need to work together to manage the FLP. The FLP had many transfer restrictions and the limited partners were not given any rights to participate in business management or operational decisions regarding the FLP.

The trust known as “Irrevocable Trust No. 1” was nominally funded at the time of the decedent’s death and received funding from the FLP. Those funds, in turn, were transferred to the charitable trust to gain a charitable deduction by the estate. Just before he died, Moore used FLP funds to make large transfers to his children that were designated as loans. He also made outright gifts to the children and to one grandchild.

The estate filed an estate tax return and a gift tax return after Moore’s death. The IRS issued a notice of deficiency for nearly $6.4 million and the case went to tax court. The U. S. Tax Court agreed with the IRS’ findings. The defense of the estate plan, the tax court maintained, was form over substance and the only reason for the estate plan and the numerous transactions was to save estate taxes.

There were a lot of hurdles in this case, in addition to the short time period for the estate plan to have been created. At the time of the decedent’s hospitalization, the sale of the farm to a neighbor was being negotiated. A contract to sell the farm was executed with days of transferring it to the living trust. There were numerous transfers and distributions made between trusts and the FLP, and the court concluded that all decisions about the FLP after its formation were made unilaterally by the decedent. An FLP is supposed to function as a true partnership. Many other issues and errors occurred in the rush to have this estate structured in such a short period of time.

Had Moore engaged in planning five or ten years earlier, there would have been time to create a plan in which both the substance and execution of the plan were sound and the family would have been able to save millions of dollars in taxes. By waiting until his death was imminent, the plan attempted to establish transfer requirements without the opportunity to execute them properly.

Reference: The Legal Intelligencer (May 18, 2020) “A Recipe for Risk—Last-Minute Tax Planning for Estates”

Distributing Inherited Assets in Many Accounts

“I am my late brother’s sole beneficiary on various investments held at different investment companies. I would like to divide the assets equally among three relatives.”

This generous individual may be facing a number of legal and logistical hurdles, before assets in eight separate accounts can be passed to three relatives, says the article “Sorting through multiple inheritance accounts” from the Houston Chronicle. Does the heir need to speak with each of the investment companies? Would it make sense to combine all the assets into one account for the estate and then divide and distribute them from that one account?

If all the accounts were payable to this person upon the death of the brother, then the first thing is for the heir to contact each company and have all funds transferred to one account. It might be an already existing account in their name, or it may need to be a new account opened just for this purpose. The account could be at any of the brother’s investment firms, or it could be with a different firm.

If the accounts are not payable to the heir, but they are to be inherited as part of the brother’s estate, the estate must be probated before the funds can be claimed. In this case, it would be very helpful if the sole beneficiary is also the executor. This would put one person in charge of all of the work that needs to be done.

However, the person eventually will become the owner of all eight accounts. Once everything is in the heir’s name, then the assets can be distributed to the three relatives. There are some tax issues that must be addressed.

First, if the estate is large enough, it may owe federal estate taxes, which will diminish the size of the estate. The limit, if the brother died in 2020, is $11.58 million. If he died in an earlier year, the exemption will be considerably lower, and the estate and the executor may already be late in making federal tax payments. Penalties may apply, so a conversation with an estate planning attorney should take place as soon as possible.

If the brother lived in another state, there may be state estate or inheritance taxes owed to that state. While Texas does not have a state estate or inheritance tax, other states, like Pennsylvania, do. A consultation with an estate planning attorney can also answer this question.

When gifts are ultimately made to the three relatives, the first $15,000 given to each of them during a calendar year will be treated as a non-taxable gift. However, if any of the gifts exceed $15,000, the person will be using up their own $11.58 million exemption from gift and estate taxes. A gift tax return will need to be filed to report the gifts. If the heir is married, those numbers will likely double.

It may be possible to disclaim the inheritance, with the assets passing to the three relatives to whom the heir wishes to make these gifts. An experienced estate planning attorney will be able to work through the details to determine the best way to proceed with receiving and distributing the assets. Depending upon the size of the estate, there will be tax consequences that must be considered.

Reference: Houston Chronicle (March 24, 2020) “Sorting through multiple inheritance accounts”

How Bad Will Your Estate’s Taxes Be?

“There were only approximately 1,900 taxable estates in the U.S. in 2018, which is less than 0.1 percent of people who died that year.”

The federal estate tax has been a small but steady source of federal revenue for nearly 100 years. The tax was first imposed on wealthy families in America in 1916. They were paid by families whose assets were previously passed down through multiple generations completely and utterly untaxed, says the article “Will the government tax your estate when you die, seizing home and assets?” from The Orange County Register.

The words “Death Tax” don’t actually appear anywhere in the federal tax code, but was the expression used to create a sympathetic image of the grieving families of farmers and small business owners who were burdened by big tax bills at a time of personal loss, i.e., the death of a parent. The term was made popular in the 1990s by proponents of tax reform, who believed that estate and inheritance taxes were unfair and should be repealed.

Fast forward to today—2020. Will the federal government tax your estate when you die, seize your home and everything you had hoped to hand down to your children? Not likely. Most Americans don’t have to worry about estate or death taxes. With the new federal exemptions at a record high of $11,580,000 for singles and twice that much for married couples, only very big estates are subject to a federal estate tax. Add to that, the 100% marital deduction means that a surviving spouse can inherit from a deceased spouse and is not required to pay any estate tax, no matter how big the estate.

However, what about state estate taxes? To date, thirteen states still impose an estate tax, and many of these have exemptions that are considerably lower than the federal tax levels. Six states add to that with an inheritance tax. That’s a tax that is levied on the beneficiaries of the estate, usually based upon their relationship to the deceased.

Many estates will still be subject to state estate taxes and income taxes.

The personal representative or executor is responsible and legally authorized to file returns on a deceased person’s behalf. They are usually identified in a person’s will as the executor of the estate. If a family trust holds the assets, the trust document will name a trustee. If there was no will or trust, the probate court will appoint an administrator. This person may be a professional administrator and likely someone who never knew the person whose estate they are now in charge of. This can be very difficult for family members.

If the executor fails to file a return or files an inaccurate or incomplete return, the IRS may assess penalties and interest payments.

The final individual income tax return is filed in just the same way as it would be when the deceased was living. All income up to the date of death must be reported, and all credits and deductions that the person is entitled to can be claimed. The final 1040 should only include income earned from the start of the calendar year to the date of their death. The filing for the final 1040 is the same as for living taxpayers: April 15.

Even if taxes are not due on the 1040, a tax return must be filed for the deceased if a refund is due. To do so, use the Form 1310, Statement of a Person Claiming Refund Due to a Deceased Taxpayer. Anyone who files the final tax return on a decedent’s behalf must complete IRS Form 56, Notice Concerning Fiduciary Relationship, and attach it to the final Form 1040.

If the decedent was married, the widow or widower can file a joint return for the year of death, claiming the full standard deduction and using joint-return rates, as long as they did not remarry in that same year.

An estate planning attorney can help with these and the many other details that must be taken care of, before the estate can be finalized.

Reference: The Orange County Register (March 1, 2020) “Will the government tax your estate when you die, seizing home and assets?”

Thinking Ahead for 2020 Elections

“Planning for changes to the estate tax and the valuation discount for small businesses can be challenging. Here’s how to take advantage of them now.”

Trying to anticipate changes in the tax codes is like trying to time the stock market—a nearly impossible task. Most tax pundits guessed right, when they said that President Trump was going to cut corporate tax rates in 2017, but the doubling of estate and gift tax exemptions to more than $23 million was a surprise. So was the elimination of deductions for state and local taxes, as reported in The New York Times article “2 Strategies to Consider Ahead of the 2020 Election.”

With a presidential election coming up this fall, the challenge of predicting the impact of changes that may affect taxpayers and their estate planning has already begun. Candidates are talking about big changes, like health insurance, climate change and infrastructure. They are also talking about changes to wealth tax, but what no one has covered yet are changes like lowering exemptions and raising rates for estate and gift taxes and ending the valuation discount for closely held family businesses. This is a tax break that lets families transfer their businesses for far less than they are worth.

This valuation can impact any small business that owners expect to transfer to heirs. The current exemption levels for estate and gift taxes are so high now, that this tax only applies to very few people. However, if the exemption levels and tax rates change, that could become a problem for business owners.

The estate tax is now in effect until 2025, with exemptions at $11.58 million for an individual, and  double that amount for a couple. Everything above that is taxed at a rate of 40%. Lowering the exemption and increasing the tax rate are on some candidate’s agendas, both to raise revenue and address income inequality.

The estate tax is a big target. This is because if the exemption were lowered, it would generate a good amount of income, and impact a relatively small group of Americans. The likelihood of this happening will depend on election results, both at the presidential and congressional levels.

The months before the election occurs may be a good time to take advantage of the high tax exemptions and valuation discounts, just in case they change. This would let business owners pass more of their wealth to heirs free of tax, and could also settle some business issues now, not later, when the owners die.

However, identifying short and long-term goals should be done before making any significant decisions. In some states, like Connecticut, it may not be necessary to plan so aggressively, because the state’s estate and gift tax exemptions are lower than federal ones. It should be noted, however, that the exemptions are set to become equal in 2023.

Eliminating the valuation discount had been proposed by the Treasury Department and the IRS under President Obama, when these discounts were seen as being overly generous. A few months after taking office, President Trump issued an executive order for the Treasury to withdraw the regulation to eliminate the discount. However, the statute is still on the books and could be easily reinstated.

This is an example of the importance of reviewing estate plans on a regular basis and creating estate plans that have enough flexibility to withstand change. Speak with your estate planning attorney to ensure that your estate plan is prepared, whatever the results of the 2020 elections may be.

Reference: The New York Times (Feb. 14, 2020) “2 Strategies to Consider Ahead of the 2020 Election”

How Should Baby Boomers Claim Their Social Security?

“Social Security benefits have long been a critical part of Americans’ retirement income plans. After all, the monthly benefits provide a stream of income that is adjusted for inflation annually and can’t be outlived. With the decline of pensions and increasing life spans, Social Security is now playing a larger role in shoring up retirees’ nest eggs.”

How you handle your Social Security income has an important effect on an overall retirement financial plan. For baby boomers, employing an intelligent Social Security strategy can increase income over their lifetimes. You show know your full retirement age, coordinate the timing of benefit claims with your spouse and weigh the advantages of delaying your Social Security benefits.

Kiplinger’s recent article, “Time Claims to Maximize Social Security Benefits,” says that with more baby boomers becoming eligible for Social Security benefits, some strategies for how to claim the benefits are going away. Full retirement age is also going up, and there’s the threat of curbs to future benefits.

However, the rules for claiming retirement benefits have become a little simpler. Under a law passed in 2015, those born on or after January 2, 1954 are presumed to be applying for the highest benefit for which they qualify—regardless of whether it’s their own benefit or a spousal benefit—no matter what their age is when they claim. The law also phases out the restriction on an application for spousal benefits, which could boost a couple’s total payout by tens of thousands of dollars. However, a small group of boomers still may be eligible to use it.

These important moves can help you maximize your lifetime benefits—and help your nest egg go much further. Full retirement age (FRA)—calculated by your birth year—is on a gradual slope upward from age 66 to age 67. Social Security benefits increase monthly by a small percentage from age 62 to your full retirement age. As a result, if you err and claim at age 66 when your full retirement age is really 66½, the loss won’t be significant, but it could be permanent, decreasing your benefits for a lifetime.

The rising full retirement age for Social Security means that those who claim early will see a larger benefit reduction. For those with a full retirement age of 66, claiming at 62 permanently reduces their benefits by 25%. However, for those with a full retirement age of 67, the reduction is 30%. A higher full retirement age also decreases the bonus for people who wait to claim until age 70. Those with a full retirement age of 66, can earn up to 32% extra—or 8% a year in delayed retirement credits up to age 70. People with a full retirement age of 67 can earn up to 24% extra.

Know your exact full retirement age to understand how your benefit will be affected by claiming at different ages. All the cost-of-living adjustments are also calculated on that higher amount, so you receive the benefit of compounding.

Your FRA is also important, if you’re still working when you claim. Retiring and taking Social Security benefits are two separate decisions. You can do one without doing the other. However, if you apply for benefits before your FRA while still working, your benefits will be subject to the earnings test. Early claimers will temporarily lose $1 of benefits for every $2 of earnings above $17,640 in 2019. In the year you hit FRA, the threshold is higher—in 2019, you’d temporarily forfeit $1 of benefits for every $3 of earnings above $46,920.

But in the month that you turn FRA, the earnings test is no longer applicable. If you plan to keep working later in life, it’s typically wise to wait until FRA or later to claim benefits. If you do forfeit any benefits to the earnings test, your benefit will be adjusted upward at your FRA to replace the missing benefits over time.

Reference: Kiplinger (July 29, 2019) “Time Claims to Maximize Social Security Benefits”