Tuesday, October 2, 2018
Many farmers and ranchers are reaching retirement age for Social Security benefit purposes. That raises numerous questions involving such things as benefits, earnings, what counts as “wages” and the cash renting of farmland. These are all important questions for farmers and ranchers to have answers to so that appropriate planning can be engaged in and expectations realized.
Social Security benefit planning – that’s the topic of today’s post.
For 2009-2020, the full retirement age for persons born in 1943-1954 is 66. Under present rules, in 2027, the full retirement age will be 67.
During the calendar year in which an individual reaches age 66, an earnings limit applies for the months before the individual reaches full retirement age. For example, for an individual that turns age 66 during 2018, there is a monthly earnings limit of $3,780 ($45,360 ¸ 12 months) for the months before full retirement age is reached. Excess earnings for this period result in a $1 reduction in benefits for each $3 of excess earnings received before attaining the age of 66 years. But, for a person that hasn’t reached full retirement age, benefits are reduced by $1 for every $2 of earnings over the annual limit of $17,040 for 2018. For those drawing benefits after reaching full retirement age, there is no limit on earnings – benefits are not reduced.
An individual can receive full Social Security benefits if they aren’t drawn until full retirement age is achieved. Another way to state it is that if an individual delays taking social security benefits until reaching full retirement age, the individual receives additional benefits for each year of postponement until reaching age 70. The rate of increase is a fraction of one percent per month. In essence, the impact of drawing Social Security benefits before reaching full retirement age is that such a person must live longer to equalize the amount of benefits received over their lifetime compared to waiting until full retirement age to begin drawing benefits.
Taxability of Benefits
About 20 million people each year, some that are undoubtedly farmers and ranchers, pay tax on their Social Security benefits. These people are commonly in the 62-70 age range. Taxing Social Security benefits seems harsh, inasmuch as the person has already paid income tax and Social Security payroll taxes on the earnings that generated the benefits. But, not every dollar of benefits is taxed. What matters is a person’s total income from non-Social Security sources such as wages and salaries, investment income (and capital gains on those investments) and pension income. To that amount is added one-half of the person’s Social Security income. The total amount then is measured against a limit. For example, a person that files as married-filing-jointly (MFJ) will subject 50 percent of their Social Security benefits to tax if the total amount exceeds $32,000 for 2018 (it’s $25,000 for a single filer). The 50 percent changes to 85 percent once the total amount exceeds $44,000 (MFJ) or $34,000 (single) for 2018. Those are the maximum percentages in theory. In reality, however, there is a complex formula that often results in less Social Security benefits being taxed than that maximum percentage. To boil it down, the formula often results in about 20 percent of Social Security benefits being taxed once the total amount threshold is exceeded.
Some farmers receive wages in-kind rather that in cash. In-kind wages such as crops or livestock, count toward the earnings limitations test. The earnings limit test includes all earnings, not just those that are subject to Social Security (FICA/Medicare) tax. But, employer-provided health insurance benefits are not considered to be “earnings” for purposes of the earnings limitation test. They are not taxed as wages. I.R.C. §3121; SSA Program Operations Manual System, §§RS 01402.040; 01402,048.
Federal farm program payments that a farmer receives are not deemed to be “earnings” when calculating each calendar year's earnings limitation. SSA Program Operations Manual System §RS 02505.115. That is the case except for the initial year of Social Security benefit application. In that initial year, all FSA program payments are counted along with other earned income and earnings for purposes of the annual earnings limitation test.
For farmers that cash rent farm ground to their employer, the cash rental income that the farmer receives will likely be treated as “earnings” even though the farmer is getting a wage from the employer. This is particularly the case if the farmer is farming the ground on the employer’s behalf. The result would be a “doubling-up” of the wage income and the cash rent income for purposes of the age 62-66 earnings test.
For a farmer that is drawing Social Security benefits, whether retired or not, Conservation Reserve Program Payments received are not subject to Social Security tax. I.R.C. §1402(a)(1).
Social Security benefit planning is an item that is often overlooked by farmers and ranchers. However, it is useful to know how such planning may fit into the overall retirement plan of a farmer or rancher. It is just one piece of the retirement, succession, estate plan that should be considered in terms of how it fits in with other strategies. While a farmer or rancher may never actually “retire,” there is a benefit to properly timing the drawing of Social Security benefits. In addition, as noted above, there are some special situations that a farmer or rancher should be aware of.
The Social Security Administration website (ssa.gov) has some useful online calculators that can aid in estimating retirement benefits. It may be worth checking out.