How to Figure Social Security Benefits

QUESTION: If we correctly understand the latest information we received from the Social Security Administration, it would appear that the longer my husband works, the lower his Social Security benefits will be.

Here’s what happened. After working full time and paying the maximum possible Social Security taxes for 28 years, my husband had a heart attack at age 55. Several years later, he returned to work on a part-time basis. Now it seems that the Social Security Administration will average in these part-time years when it calculates whatever benefits he is entitled to. My husband will be 62 next year, and although he would like to continue working, maybe he should just retire to preserve his benefits status.--M. L. C.

ANSWER: Now, hold on. According to the Social Security Administration, your husband’s part-time job should actually be helping, not hurting, his expected Social Security benefits. Here’s why:

Social Security benefits are calculated according to a multi-step formula that takes into account the recipient’s date of birth, the number of years he or she has worked, as well as the amount of money he or she has contributed to the Social Security fund.

Using that formula, your husband will be awarded benefits based on the highest 34 years of his earnings. Now, since you say he was employed full time for 28 years, if he retires next year, his average will include six years of “zero” contributions to Social Security. However, if he adds contributions from part-time employment, that average will be increased.

“Any amount of earnings is better than nothing,” says Roy Aragon, of the Los Angeles branch office of the Social Security Administration.

By the way, please remember that if your husband elects to take his Social Security benefits at age 62, his average monthly check will be about 20% lower than it would be if he waited until age 65 to receive benefits.

Q: In a recent column, you said two single adults, age 55 or more, who share ownership of a residence would each be entitled to exclude $125,000 of gains on their income taxes when they sell their house. This means that these two people could shelter as much as $250,000 in real estate gains.

However, you said that a married couple would be entitled to use just a single $125,000 exemption. It just seems to me that your answer makes a good case for a married couple to divorce and then continue to co-own and reside in their house for the next three years. Would each party then be eligible for the $125,000 exclusion? It doesn’t seem right, does it?--M. G.

A: Maybe not to you, but our tax advisers say the Internal Revenue Service has no problems with this scenario.

Basically, our advisers say the IRS is interested in your marital status at the time you sell your house, not your situation when you bought it. So, if you get divorced and meet the minimum residency requirement of living there for three of the last five years, you and your wife may each claim the $125,000 profit exemption. Even if one spouse moves out, that person can still claim the exclusion if he or she meets the residency requirement.

One caveat: Unlike with married couples, each member of an unmarried home-owning group must be at least age 55 to claim the exemption. In a marital ownership situation, the couple may qualify for the $125,000 exemption if just one member has reached age 55.

Q: I have been buying shares and reinvesting dividends in a utility company since late 1979. My cost basis ranges from $10.50 to about $40 per share, and I now own about 6,700 shares. This company is expected to merge with a larger utility next year, and when the deal is completed, I should have about 9,100 shares of the second company. Let’s say I want to sell 200 shares of this second company’s stock; how do I figure my cost basis?--H. E. M.

A: Actually, despite the complicated maneuverings, it’s going to be easier than you might think.

But, first, let’s discuss why you must be able to determine your cost basis. The reason you need to know the cost basis of your holdings is to compute your taxable gain or loss when you sell any of your investments. Practically speaking, an owner’s basis in stock is simply his cost minus any purchase charges.

And this is the formula you should use to compute your basis in the shares you receive in the second company. Simply add together your total investment in the original utility company--purchases and dividend reinvestments--and divide the amount by the number of shares you receive in the second company. So it you have a total investment in the initial company of $150,000 and you receive 9,100 shares of the new company, your cost basis of these new shares is $16.48.

Q: Is it true that if you own stock in a particular company, you can attend its shareholder meetings and write off the expenses as a tax deduction?--R. L.

A: Let me see. . . . Let’s rephrase that question. Are you really asking whether you can buy shares in Pacific Gas & Electric and write off the cost of a trip to San Francisco as a business expense? If so, the answer is “no.”

Unless your stake in a particular company is so significant that your presence is absolutely required to protect your position, you can safely assume that your attendance at an annual meeting will not meet the IRS’ definition of an “ordinary and necessary expense” of maintaining your investment in the company.

Furthermore, and just for your additional information, expenses that do meet the IRS definition of an “ordinary and necessary” outlay may be deducted from your income only to the extent that they exceed 2% of your adjusted gross income.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.