Q: I started collecting Social Security at age 62. My husband retired at 65 a few years later. We had planned that I would receive half his Social Security when we retired, but I'm not. Yet my friend, who hasn't worked a day for 40 years, is getting benefits equivalent to half her husband's. How can this be? --M.W.
A: It's simple. You elected to begin receiving Social Security benefits at 62 instead of 65. Even though you began drawing on your own account and may now be receiving spousal benefits, your monthly check is somewhat--but not a lot--less than 50% of your husband's because you have been receiving benefits for three years. Your friend didn't receive benefits before turning 65.
Of course, there is a larger issue in the question you raise: whether spouses who have never worked outside the home and never contributed to Social Security should be entitled to the same or greater benefits than spouses who have worked for years.
The Social Security Administration can only say that the program, nearing its 60th anniversary, was created before large numbers of women joined the work force. The original purpose of the benefits structure, they note, was to support entire families, not individuals. So payments to spouses are not based on whether they have worked or the amount of their contributions to the system, but on an overall support level for the couple: 100% for the primary wage earner and 50% of that for the spouse upon turning 65.
Is this fair? That's a question that has confounded Congress for years. As you know, efforts to overhaul the Social Security system have not been well received. You can imagine the large numbers of non-working spouses, many at or near retirement age, who would resist the changes your inquiry suggests. Perhaps this is a change that can be made more easily when the current generation of working women nears retirement.
How to Deduct Interest on Interest-Free Loan
Q: In a recent column on loans between family members, you mentioned that if the lender makes an interest-free loan, he is deemed to have received "forgone interest" anyway and could be liable for taxes on that amount, even though he didn't actually get it. What about the borrower? Is he also deemed to have made the interest payments? Is he then allowed a deduction on his taxes, even though no money has changed hands? --D.C.
A: Yes, as bizarre as it seems, the borrower can be eligible for an interest deduction on his income taxes, even though he has not made interest payments. However, whether he is entitled to the deduction is subject to another test: how the borrowed money was used and how the loan is classified.
If the borrowed money was used to purchase a home or start a business, it would be deductible--because home mortgage interest and business interest are deductible on federal and state taxes. Furthermore, if the loan is secured by the borrower's home and does not increase the borrower's home-indebtedness more than $100,000 beyond the purchase price, the interest payments would be deductible because the loan would be considered a home-equity loan.
However, if the borrower were getting a personal loan from a family member, the interest would be treated like other personal- or consumer-loan interest. In 1990, just 10% of personal interest is deductible, and the deduction is eliminated next year.
So, what matters is not so much who made the loan or what interest rate is paid, but whether the interest meets the IRS' criteria for interest deduction.
Investing Your Child's Money Is Allowed
Q: Substantial funds have accumulated in our children's California Uniform Gift to Minors accounts. We would like to use the funds as a down payment on a single-family home that we would use as a rental. Our children are ages 8 and 13. Is our plan legal? If we proceed, should their names be on the title to the property? If their names are on the title, do we lose some of the tax benefits? We're interested in a real estate investment with the funds because we will not need the money for more than four years. Does our plan make sense? --M.F.
A: You have raised some questions that require the analysis of a qualified financial planner or tax accountant.
Based on what you've told us, our experts can't determine whether it is wise for you to invest your children's money in residential real estate. It might be, but you should get this opinion from someone who has reviewed your tax situation, financial condition and your children's bank accounts.
That said, if you want to proceed with the real estate purchase, your idea of using your children's money to buy investment property should work. The Internal Revenue Service is concerned only that parents do not use their children's money for their own purposes. So document your actions carefully.
Whether your children's names should appear on the title depends on whether they are 100% owners of the property or partners with you and others. You may find banks and thrifts unwilling to make an investment-property mortgage loan to minors with no steady income. In this case, you can talk to the lender--or perhaps a lawyer, tax accountant or financial planner--about how the title and deed should be written.
About real estate tax benefits: Remember, at least a part of this purchase is supposed to be your children's investment. To the extent that it is, tax benefits flow to your children. If they don't need tax deductions--and many don't--then you might want to consider another investment for them.