SS/Medicare "wrinkle"

[ronin]

Had my taxes done yesterday. In talking with my tax guy, who always has one or two interesting suggestions most of which I ignore (after trying to find out how potentially illegal they are), he made the following recommendation for my wife.

Briefly, she is 11 credits shy of qualifying for SS on her own earnings record, due to her career in teaching and not contributing to SS for over 30 yrs. She will qualify as spouse since I do qualify for SS. So she'll also qualify for Medicare under me. GPO will eliminate any spousal benefit she'd otherwise get under my record.

The scheme is to show some earnings, in this case $6K per year, for 3 yrs of maybe a little less to garner those missing credits and get her to qualify on her own record. The wrinkle is that she wouldn't actually work and earn the dough, it'd be listed as self-employment income. She'd pay the income and self-employment payroll taxes on phantom income.

Here's the rationale. Even with WEP, by using the SS WEP benefit calculator she'd get around $106/mo. in today's $ ($120 in future $) at FRA of 66. I calculated the tax cost and the future potential earnings in SS benefits and got a breakeven at less than 6 yrs. The additional kicker is we contribute an amount equal to the phantom income to her Roth IRA. So there's a little bit of a tax savings potential there as well.

Morality aside, it seems to make sense financially. What do you folks think?

 

[LARS]

Sounds like FRAUD to me not to mention immoral...

 

[haha]

The scheme is to show some earnings, in this case $6K per year, for 3 yrs of maybe a little less to garner those missing credits and get her to qualify on her own record. The wrinkle is that she wouldn't actually work and earn the dough, it'd be listed as self-employment income. She'd pay the income and self-employment payroll taxes on phantom income.

Here's the rationale. Even with WEP, by using the SS WEP benefit calculator she'd get around $106/mo. in today's $ ($120 in future $) at FRA of 66. I calculated the tax cost and the future potential earnings in SS benefits and got a breakeven at less than 6 yrs. The additional kicker is we contribute an amount equal to the phantom income to her Roth IRA. So there's a little bit of a tax savings potential there as well.

Morality aside, it seems to make sense financially. What do you folks think?

Your task seems similar to that of any money launderer. You need to move apparently illegal flows in such a way that they will look legal when examined.

I can't advise on this scheme, as it is likely illegal (immorality is a totally different and less relevant issue). But there should be legal ways to accomplish the same thing. Can your children hire her to advise them on landscaping? Could she wait tables at lunchtime in a nearby restaurant? Do a bit of baby-sitting? How about getting the gross she needs selling on Ebay or Amazon? As I remember there is an election available to pay tax and self employment income on the schedule C gross if under a certain amount. Thus it may be that a very small volume of sales would give you the the quarterly amount needed on form SE to qualify for SS time.

This way it may be legal, (I think it would, but I am not informed about this) it would not take money out of your pocket, and it would still accomplish your intended fiddle.

Ha

 

[beowulf]

Sounds like FRAUD to me not to mention immoral...

OK, but besides the obvious, what do you really think ?

 

[LARS]

I can't advise on this scheme, as it is likely illegal (not immoral, a totally different and less relevant issue).
Ha

Obviously your defintion of "immoral" and mine differ. Moreover, while not always the case, it is usually a safe assumption that if something is illegal it will most likely be immoral as well.

im·mor·al

1.
violating moral principles; not conforming to the patterns of conduct usually accepted or established as consistent with principles of personal and social ethics.

 

[Moemg]

Since she already gets more than that on your benefit I do not see the purpose of it ?

 

[samclem]

If she "doesn't actually work and earn the dough" then it is illegal. But the good news, as haha points out, is that it would be very easy for her to set up a little business and legitimately show enough income to qualify for SS. The customers can be family members.

What I don't quite "get" is how this benefits you guys. I'm assuming that her spousal benefit (on your record) will be worth more than this small self-earned benefit, and she can't get both of them. What's the advantage of doing this?

 

[haha]

Obviously your defintion of "immoral" and mine differ. Moreover, while not always the case, it is usually a safe assumption that if something is illegal it will most likely be immoral as well.

im·mor·al

1.
violating moral principles; not conforming to the patterns of conduct usually accepted or established as consistent with principles of personal and social ethics.

Lars, I don't need a lecture from you, or a summary of your ideas of the interactions between legality and morality, which have been written about at length by people more capable than either of us. In any case, you misunderstood my post to OP. I meant to convey that I am no arbiter of morality in anyone else's life, (and I try my best to avoid those who appoint themselves to this position), but legality applies more across the board and is a technical question.

While you are at it, please spare me your dictionary quotes, an annoying and useless ploy.

Ha

 

[ronin]

Since she already gets more than that on your benefit I do not see the purpose of it ?

GPO: govt. pension offset. Wipes out any spousal benefit.

Just so everyone knows, we declined and this was not intended to go off on the legality/morality tangent. I know very well how to legally accomplish the acquisition of income in this case (with or without any actual labor involved). I thought it interesting as he trotted this one out as a standard tactic he uses for teachers. He said that there is actually a software program that figures it all out.

 

[haha]

GPO: govt. pension offset. Wipes out any spousal benefit.

Just so everyone knows, we declined and this was not intended to go off on the legality/morality tangent. I know very well how to legally accomplish the acquisition of income in this case (with or without any actual labor involved).

Then I am confused as to why you asked

What do you folks think?

 

[powerplay]

After the proposal he made to you for the SS income I'd be concerned about the tax returns he is doing for you.

 

[LARS]

Lars, I don't need a lecture from you, or a summary of your ideas of the interactions between legality and morality, which have been written about at length by people more capable than either of us. In any case, you misunderstood my post to OP. I meant to convey that I am no arbiter of morality in anyone else's life, (and I try my best to avoid those who appoint themselves to this position), but legality applies more across the board and is a technical question.

While you are at it, please spare me your dictionary quotes, an annoying and useless ploy.

Ha

Based upon your original post you clearly did need the help, and perhaps my next post ought to be on manners. Something clearly lacking in your post.

 

[travelover]

I used to work for a guy that hired his kids every summer and then had them collect unemployment insurance in the fall when they went back to college. Didn't pass the sniff test.

 

[haha]

Based upon your original post you clearly did need the help, and perhaps my next post ought to be on manners. Something clearly lacking in your post.

Well thank you then, and if you don't mind I'll keep you in mind for the next time I need a moral compass and Ted Haggard is not available.

 

[samclem]

There are folks who hire their kids to do work, then use their earnings to set up Roth IRAs for their kids. It's a good use of the tax laws, provided the work and pay rate is legitimate (as viewed by the IRS).

 

[youbet]

I used to work for a guy that hired his kids every summer and then had them collect unemployment insurance in the fall when they went back to college. Didn't pass the sniff test.

Interesting. In Illinois, the UI rules would prevent this unless the kids lied about being in college and swore they were 100% available for work and had records showing they were actively looking for work. I think the temptation to "snitch" and let the state know what's going on would have been too much for me to resist!

 

[youbet]

GPO: govt. pension offset. Wipes out any spousal benefit.

Just so everyone knows, we declined and this was not intended to go off on the legality/morality tangent. I know very well how to legally accomplish the acquisition of income in this case (with or without any actual labor involved). I thought it interesting as he trotted this one out as a standard tactic he uses for teachers. He said that there is actually a software program that figures it all out.

My DW is also a retired teacher. Because she taught at a local private college part time (adjunct faculty) and paid into SS for several years while simultaneously doing her full time public school teacher gig (no SS), she did accumulate her 40 quarters for SS. She'll get about $100/mo at FRA calculated with WEP. Because the amount she paid in was so little, this turns out to be a great ROI with a short break-even period similar to what you calculated your DW's would be.

When I hear folks whining and crying about WEP, I can't help but laugh at them. How greedy can they get? Even with WEP, most folks like teachers who work just enough to qualify for SS get a fabulous return. SS is set up to benefit low earners the most and WEP only tones that down by reducing SS benefits for folks whose main gig was covered by a public pension. IE., folks who weren't really low income earners. It's the folks w/o a public pension who pay the max SS for 30 - 40 yrs who should be whining.......

In regard to your question, since your DW did not participate in SS for the required 40 qtrs, the "creative" solutions suggested by your tax preparer, or some of the suggestions other posters have made, might be the way to go. But I'd be sure whatever you did was (1) absolutely legal and audit proof and (2) not too much hassle. You're talking about $100/mo here. Not worth taking a legal risk or subjecting yourself to any significant pita hassle.

EDIT: Oh yeah, if you haven't noticed, teachers today do pay into Medicare so the issue of qualifying for Medicare no longer exists for them.

 

[LARS]

Well thank you then, and if you don't mind I'll keep you in mind for the next time I need a moral compass and Ted Haggard is not available.

You're welcome (dripping with the just the right amount of sarcasm)...

 

[ronin]

EDIT: Oh yeah, if you haven't noticed, teachers today do pay into Medicare so the issue of qualifying for Medicare no longer exists for them.

Actually depends on when you were hired. I forget the cutoff date, but I taught for 21 yrs and was required to start contributing to Medicare about half way along. She taught for 31 and had the option of contributing or not. So somewhere in between the law was changed. We chose not to since she's covered as my spouse.

 

[steelyman]

I was in a similar situation. I am a university employee hired prior to the change to Medicare contributions. Through prior jobs, I'd accumulated some SS/Medicare credits, but not enough to qualify. For the past several years, I've picked up (legitimate) outside work and have filed the self-employment taxes. I've now picked up enough credits to qualify and will probably continue with the outside work. I was solely concerned with qualifying for Medicare, as I do not count on much of anything from SS and with the current uncertainty of benefits for state employees, it seems like a good idea to not rely entirely on the retiree health plan promised by the state.

 

[lemming]

If your wife turned in the shady practitioner of these schemes and got the whistleblower reward would that count as earned income to her?

 

[travelover]

If your wife turned in the shady practitioner of these schemes and got the whistleblower reward would that count as earned income to her?

Yes, but if I was her I wouldn't report it.

 

[ronin]

That's a good one! We'll have to encourage him (or an associate if he's hauled off) to keep the shady schemes coming for a couple more yrs. and she'll be set.

 

[growing_older]

I thought it interesting as he trotted this one out as a standard tactic he uses for teachers.

These complicated rules seem to encourage lying and scheming for material gain and in the long term seem to weaken the idea of what is moral and not. The idea that an "adviser" counsels clients how best to cheat is even more upsetting.

 

[sheehs1]

GPO: govt. pension offset. Wipes out any spousal benefit.
I thought it interesting as he trotted this one out as a standard tactic he uses for teachers. He said that there is actually a software program that figures it all out.

Just checked my teacher daughters first year W2 from her school district in Va. Her district pays the 5% of salary into the Va Retirement System.. She also pays into the social security system as it is a deduct on her pay stubs and W2.
I don't know if this means she is entitled to get both in 30 years or not.

This must be a state by state thing.