Yellowstone Financial, Inc.

Your Taxes Will Change and Advanced Social Security Tricks

By now you may have tired of talk of the fiscal cliff.  Our fears are being fed by national reporters stalking the halls of Congress looking for any sign that the Potomac stalemate fever has finally broken and that deals are getting done.  It turns out there are some outcomes that are almost certain regardless of the results of Beltway wrangling.  We can use them to make smart financial moves by year’s end.

Before we consider the cliff, let’s follow up on Social Security and questions on an esoteric provision called “file and suspend.”  It’s particularly helpful if one spouse has earned significantly more than the other over their working lives.

Let’s imagine Jake is 63 years old and hasn’t filed for Social Security yet.  His full retirement age is 66 and would qualify for a $2,200 monthly benefit.  If he waits until age 70, he would qualify for $2,904 a month.  He’s married to Monica, who is also 63 and qualifies for $900 a month at age 66 and $1,188 a month on her own record if she waits until age 70.

Once Jake reaches age 66, he can file for Social Security benefits and then suspend his application.   Monica would be able to file an application for a spousal benefit of 50 percent of Jake’s entitlement — $1,100 a month.  She continues to collect for the next four years while Jake builds up credit for delayed retirement.   When they turn 70, he begins his higher $2,904 a month benefit.  Later if Jake dies first, then Monica can assume his higher benefit for the rest of her life.  This is a complex strategy and one that should be pursued with a knowledgeable Social Security expert or with software such as

Now let’s consider the fiscal cliff.  One of the most significant tax breaks will almost certainly disappear as there is little support for its extension by either side of the aisle.  It’s the two percent Social Security holiday that we have been enjoying for the past two years.  Most of you will see an effective pay cut of two percent starting January 1, while persons earning over $113,000 will see take home pay go down by over $2,200 next year.

Plus we’re bound to see increased market volatility over the next several weeks as we work our way through the automatic spending cuts and tax increases of the fiscal cliff.  If you don’t believe in your investment strategy, now is the time to fix that.  If you’re devising it in the midst of big swings in the market, the temptation will be to cave into your gut which rarely serves your finances well.

Finally, you should consider that Obamacare is here to stay.  The Affordable Care Act has two important tax provisions that affect high earners.  First if you have an adjusted gross income over $200,000 (single) or $250,000 (family) through wages or self-employment income, you will pay a .9 percent Medicare surcharge tax above that level starting next year.   In a new twist, there will be an additional Medicare tax on investment income exceeding adjusted gross income over those same limits.  This 3.8 percent surcharge will apply to capital gains, dividends, rental income, interest, and other passive income.

If you’re in those high earning categories, it may be time to consider harvesting capital gains and Roth conversions, and for business owners delaying expenses and hastening receivables.

Dave Gardner is a certified financial planner with a practice in Boulder County.  He can be reached at