Mitt Romney recently celebrated his 65th birthday.
But while this milestone spurs many Americans to retire and begin claiming Social Security benefits, Romney told Fox News host Neil Cavuto that he has no plans to sign up for his entitlement checks anytime soon.
It's not just because he hopes to be president. Romney's up to something else entirely here.
This Is Not Romney's Time
You see, as SmartMoney columnist Jack Hough recently wrote, "a savvy retiree can maximize benefits by choosing to begin payments at just the right time."
Citing a working paper written by economists John Shoven at Stanford University and Sita Nataraj at Occidental College, he elaborates, "Monthly payments are 76% greater for a retiree who waits until age 70 than for one who begins collecting at 62, adjusted for inflation."
Because life expectancy continues to rise and real interest rates are zero (and interest rates on "safe" bank accounts aren't much higher), it's clear that delaying the day when you apply for Social Security benefits is a move most Americans should make, not just Mitt.
We're talking here about a simple move that could mean the difference between pinching pennies in retirement and living out your golden years comfortably. And while Romney isn't quite in the same boat as the rest of us, you can bet this is why he's delaying taking Social Security benefits.
Are You Compounding Your Biggest Retirement Fears?
Unfortunately, most Americans aren't familiar enough with the system (or are confused by the complexity of the system's minutiae) to know just how important a decision delaying benefits could be. Most still begin taking Social Security payments at 62, or after stopping work.
After working a job for 30 years or longer, hitting the eligible age for Social Security is a milestone that reminds most folks to slow down and enjoy the remainder of their life, living out lifelong dreams and spending time with their kids and grandkids.
But when you think about it, the two biggest "worries" folks nearing retirement have are:
1. Whether they will outlive the money they've saved.
2. Whether their savings will be eroded by inflation.
Delaying Social Security benefits will provide a hedge against both of these fears.
Paul Solman of PBS' NewsHour likens it to buying old-age insurance. As he says, "The cost: the foregone Social Security checks between ages 66 and 70. The benefit: If you live past your early 80s, you are receiving more in total than had you started collecting at 66."
Plus, with annual cost-of-living adjustments, your Social Security payout is protected from inflation.
That's what Mitt's doing. And now you know this strategy, too.
This article was written by Motley Fool analyst Adam J. Wiederman. Click here to read Adam's free report on how to ensure a wealthy retirement.
What Mitt Romney Knows About Social Security That You May Not
If you think Romney and Gingrich disagree about undocumented immigrants, their tax returns suggest that they're polar opposites when it comes to investing in municipal bonds to earn tax-free interest.
The former speaker's 2010 return shows he earned $10,754 of tax-free interest, compared to $26,655 of the taxable variety. Romney's forms show just $557 of tax-free interest and $3,295,727 of taxable interest income.
Remember, to figure the taxable-equivalent yield of a tax-free bond, divide the tax-free yield by 1 minus your marginal tax rate. Since Gingrich's marginal rate is 35%, a 3.5% tax-free yield is worth the same as a 5.38% taxable yield (3.5/0.65). Romney was hit by the alternative minimum tax in 2010, so his marginal rate was 28%. Avoiding a 28% tax makes a 3.5% tax-free rate equal to a 4.86% taxable yield (3.5/0.72).
When you buy your principal residence, points you pay to get your mortgage are fully deductible on your tax return for the year you close. When it comes to a second home (or a rental property or a refinancing), however, that cost must be amortized over the life of the loan -- 1/30th a year if you have a 30-year mortgage, for example. That can lead to relatively small -- and relatively easy-to-forget -- write offs.
But if you follow Gingrich's example, you won't miss this tax break. His return shows a $19 deduction for a portion of the $2,261 it cost him to refinance the mortgage on a rental property he owns in Whitehall, Wisc. Since the refi was in October, 2010, he got to write off one-fourth of 1/30th of the cost on that year's return.
Anyone planning a substantial charitable gift this year should take a page from Romney's playbook and consider donating appreciated securities rather than cash.
As long as you have owned the asset for more than a year, you get to deduct the full fair market value of the gift, not what you paid for it. (And neither you nor the charity ever has to pay tax on the appreciation that accrued while you owned the stock.)
Romney's 2010 return shows that he and his wife, Ann, donated $1,525,167 in cash and another $1,458,807 in non-cash gifts -- much of it appreciated stock in Domino's Pizza.
Even if you don't itemize deductions, you can write off alimony paid to an ex-spouse ... as long as you also include the ex's Social Security number so the IRScan make sure he or she reports the amount as taxable income. Gingrich fulfilled that requirement and deducted the $19,800 he paid his ex-wife in 2010.
Tax law allows you to deduct the loss on a stock that becomes worthless, treating it as though you sold it for $0 at the end of the year in which it lost all value. That appears to have happened to at least one of Mitt Romney's investments. His return shows a $63,511 loss on shares in an investment fund that were disposed of for $0.
The stock market meltdown of 2007-2009 was not kind to Mitt Romney. He suffered losses so serious that, even after wiping out all of his capital gains, he carried $4,844,089 of long-term losses over to his 2010 tax return.
Remember, losses are used to offset gains dollar for dollar, but then only $3,000 of excess loss can be deducted against other kinds of income such as salary or interest income. Any excess is carried over to the next year. On his 2010 return, Romney used nearly $5 million of such losses to offset gains that would have otherwise been taxed at 15%, saving him $726,613.
If you had carryover losses on your 2010 return (as the Gingriches did), be sure to revive them when you complete your Schedule D this spring.
Congress has created special rules for what it calls "passive activities," a group that includes most investments in real estate and limited-partnerships.
Basically, losses from such investments can only be deducted against gains from similar activities. There's an exception that allows up to $25,000 of loss from rental real estate to be deducted if you are "actively" involved in the rental.
We don't know if Gingrich is actively involved in the rental in Wisconsin, but even if he was, he would not have been permitted to deduct the $4,646 loss he reported. The $25,000 allowance gradually disappears as adjusted gross income moves between $100,000 and $150,000. With AGIof $3,142,066, Gingrich is out of luck. (He can stockpile the disallowed loss and deduct it when he sells the property.) By the way, the Romneys return shows that the passive loss rule blocked the deduction of over $2 million in losses from limited partnerships.
Plenty of politicians have gotten in trouble in the past for failing to pay Social Security taxes for their child-care providers and household help. For 2012, if you pay household help more than $1,800, you are required to file a Schedule H with your return and pay Social Security and Medicare taxes for your employee.
Both Romney and Gingrich included the form and paid the piper for their household help in 2010. Ann Romney reported that she paid four household employees a total of $20,603 in 2010 and paid $3,152 in taxes for them. Gingrich reported that he paid household help $14,774 and paid $2,260 in Social Security and Medicare tax.
The federal income tax is on a pay-as-you-earn system. If you don't pay in enough during the year -- via withholding from paychecks or estimated tax payments -- the IRSwill slap on an underpayment penalty. Generally, you avoid the penalty if your payments during the year are at least 90% of what you owe. Gingrich owed an extra $382,734 when he filed his $2010 return, 38% of his tax bill for the year. That triggered an underpayment penalty of $1,543.
The opposite side of the coin from the underpayment penalty is paying in too much doing the year. About 75% of all taxpayers are in this boat, and get tax refunds every spring. We think that's silly, and have a calculator to help you match withholding from your paychecks to what you'll owe for the year. Our calculator won't help Romney, though, since he has no wages from which to withhold. He overpays via quarterly estimated tax payments, and boy does he overpay! His 2010 return shows that he paid in $1,609,441 more than the $3,009,766 that he owed. He didn't ask for a refund, though. He let the IRSkeep the cash as a down payment on his 2011 tax bill.
For 2010, the 6.2% employee share of the Social Security tax applied to the first $106,800 of wages. (The wage base is $110,100 for 2012; the rate is 4.2% for January and February and will jump back to 6.2% if Congress fails to extend the payroll tax holiday.) If you work more than one job and your combined salary exceeds the wage base, too much tax will be withheld from your pay. That happened to one of the Gingriches in 2010, so they claimed a credit of $367 to reclaim the excess tax withheld.
A special rule allows qualifying self-employed workers to deduct 100% of their medical insurance premiums, even if they don't itemize deductions. That might have helped Romney, who reported that he paid $14,176 in self-employed health insurance premiums in 2010. But he didn't get the tax break. Rather than claim the special deduction, Romney reported the premiums as medical expense on Schedule A, where a deduction is allowed only to the extent such expenses exceed 7.5% of adjusted gross income. Romney's $14,176 of premiums fell well short of $1,623,488 (7.5% of his AGI).