Consider Repaying and Reapplying for Social Security?

If you are 62 and retired, should you take benefits early with the intent of repaying and reapplying at a later age? My answer is yes, but.

First, your benefits will be subject to federal income taxes depending on their level and the level of your other taxable income. However, according to page 15 of IRS Publication 915 you can recover such tax payments by either a) deducting the benefits you repay in the year you repay them (i.e., by including them with your other itemized schedule A deductions) or b) figuring out the extra taxes you paid each year in the past on the past benefits you are paying back, add them up, and taking them as a tax credit. Whichever method results in lower taxes is the one you get to use. You'll lose interest on the tax payments, but that's not likely to outweigh the considerable advantage of repaying past benefits and then reapplying for a higher annual benefit. So taxes are not a reason to avoid taking benefits early and then planning to repay and reapply, say, at age 70.

The real question here is whether the government will decide to close down or make more costly the option of repaying and reapplying before you have a chance to do so. So far our discussions with the Social Security Administrations suggests that Social Security itself is only too happy to maintain this policy if it can provide retirees with a higher living standard. On the other hand, if Social Security starts getting hundreds of thousands of requests to repay and reapply, it may start to realize that not requiring repayers to pay back with interest, let alone actuarial interest (which is what should be charged), is costing the government money. At that point, someone in Congress may move to close down this option or require that repayment include actuarial interest charges (which are higher than regular interest charges).

Assuming the option remains in place in its current form, you can use ESPlanner (see this forum topic) to determine the advantage of taking benefits at 62 and then repaying and reapplying at 70 compared to, for example, simply waiting until 70 to take benefits. If you do decide to take benefits early with the intent of repaying and reapplying, we recommend you fill out, but not file, a separate tax return each year that does not include your Social Security benefits. The difference in taxes on this extra return and the actual return you file represents the extra tax payments you'll be able to recover as a tax credit when you ultimately repay and reapply. Keeping your past actual tax returns and these annual alternative returns will provide you with documentation to substantiate the tax credit.

To use ESPlanner to determine the advantage of taking benefits early with the intent of repaying and reapplying, follow these steps:

Set up two profiles -- C and D and compare living standards. Profile C -- tell the program you'll start collecting at age 70. Profile D -- tell the program a) you're going to take benefits at 62, b) that you have to make a special expenditure at age 70 in dollars equal to the sum of all the dollars you expect to receive in benefits between ages 62 and 69, c) specify a special receipt in today's dollars that will start at age 70 and continue until your maximum age of life, which equals the increase in your Social Security benefit from reapplying at age 70, and d) specify a deductible special expenditure at age 70 equal to the repayment you'll make at 70 and a non-taxable special receipt of the same magnitude; this will get the taxes right when you are 70, without affecting your cash flow.

Note, you'll need to factor-in future inflation-adjustments to your age-62 benefit to determine the correct dollar amount you'll need to repay at age 70. Use the same inflation rate that you enter in the Assumptions folder.

Sorry this is so complicated. Thank Uncle Sam.

best, Larry

I'd like to model this, and am trying to understand the above method. Why do I need to:

b) make the special expenditure, then
d) make the special expenditure AGAIN, but deductible, along with an equivalent non-taxable special receipt?

Why can't I just make the b) special expenditure tax deductible in the first place, and skip step d)?

Also, would there be any difference if I modeled this with a profile D where, instead of collecting Social Security at age 62, I have taxable special receipts from age 62-69 that model(match) the expected Social Security for those ages, then apply at age 70 (with the tax deductable special expenditure matching the special receipts from age 62-29)?

Thanks. I know this is a complex issue, and I want to understand what I'm modeling.

I'm confused too. About b) the special expenditure, and then d as well.

I would love to have a second pair of eyes look at what I am doing on this.

Hi Guys, Yes, I think the special receipt in d is wrong. I don't know why I wrote that. Sorry for the confusion. Call me at 617 834-2148 if you need help on this. best, Larry