Life Insurance Agents Earnings Are Exempt in Retirement from Social Security Earnings Test

[walthamny]

I just read this article and it mentions something that I have not heard about all these years selling life insurance. Basically, if an agent retires early and receives Social Security, there is an earnings test to determine how much of that is taxable. However, if an agent is only receiving renewal income for any policies they sold before retiring, that does not count as income for determining if Social Security is taxable. So an agent can easily collect Social Security and 100k in renewals and the Social Security can be tax exempt. It is good to know this strategy now.

Here is the article that mentions this.

Some compensation is exempt from Social Security earnings test

 

[Cornelius]

Wow. Double wow...

 

[heynow5]

When you file a tax return you just put in 1099 income. Never paid attention but I wonder if they is a way to declare the income is trail income and not new business.

 

[pfg1]

I "think" ss looks at W-2 income and self employment tax paid. Not sure how the 1099 $ fits into that calculation... and I'm also not sure if there is a way to differentiate earned income or trails. ??

 

[SammyJ]

I assure you the Irs would 100% challenge that on an independent agent. Whats retirement for a 1099 independent agent? If you have a book of business like P@c or Med sup and you're independent .If you stop writing new business you still will have to work to service that business or it will fall off the books quick. The 1099 you get doesn't break down First yr or renewal commissions.

 

[walthamny]

You pay income tax on any 1099 income you receive. The tax break comes with the Social Security income. There is a test to determine whether Social Security is taxable or not. And if your income was only Social Security and renewal income(1099), you only pay income tax on the 1099 income only. Social Security becomes tax free. This tax break it seems will mostly help insurance agents as they are saying renewal income is really prior service work and the sales activity took place before retirement therefore it is not added into the social security earnings test.

Frankly, the regulation is stupid, but I can see some great tax planning for an independent agent. You have to be retired so you cant sell new policies. I actually have no idea how they differentiate renewal income versus new sales.

 

[scagnt83]

I actually have no idea how they differentiate renewal income versus new sales.

This is just an assumption, but many things tax related are based on good faith. How do they know if you really bought that new printer you deducted for your business?? Or that you actually drove 20k "business" miles last year?

They dont... unless they audit you.

So agents could lie about the renewal income, but it could screw them big time if they ever get audited. And if you do get audited, they dont ask for 1099s... they already have a copy of those... they want commission statements, and those break down renewals vs. first year.

 

[Cobes]

Having retired from Social Security but having a Social Security retirement/disability consulting business for a total of 43 years in Social Security experience, I would say be careful not to mingle tax filing rules with earnings test rules. They are two entirely different issues. The renewal earnings will be subject to "income" taxes but may not count for the under full retirement age "earnings test". The earnings test restriction is removed for individuals who attain Full Retirement Age, currently 66. See the SSA publications site to access a reference for Special Payments after Retirement. If you are still actively seeking "new" business in addition to renewals, you may have to provide extra documentation for SSA NOT to count the renewals.

Renewals ARE taxable income and may also (if sufficiently high) cause Social Security benefits to be subject to income tax.
BE CAREFUL!!!

 

[alexhon]

its double ....