Since my focus is helping families with disabilities, I’m hoping to raise awareness for all those parents out there who may be self-employed. There is, with good reason, a belief the best thing to do is maximize your business expenses to reduce your taxable income. Here’s the catch – your taxable income is what your social security benefit is based on.
In other articles I’ve reviewed the adult disabled child benefit, but as a reminder this benefit is for adult children with a Social Security recognized disability diagnosed before the age of 22. It is 50% of the parent’s retirement benefit when the parent files (and while parent is alive). It increases to 75% when the parent dies.
What does this mean? It means if you are a business owner and you are deliberately keeping your reported taxable income low you’re also contributing a lower amount to Social Security. Social Security uses the average of 35 years of work history to determine your benefit – so one or two low income years is not a big deal.
However, if you’ve been working for 40 years and reporting very low income you need to consider (and plan for) how your child will enjoy their life when you’re gone – if you’re currently subsidizing (paying for things) them. This could mean you have a large life insurance policy, you start increasing your taxable income so you can increase your social security or you’re spouse has been working and you’ll use their benefit.
One last consideration, about you. How are you going to fund your retirement? Again social security retirement is based on what you’ve paid into the system. Hopefully you’ve been aggressively saving into a retirement account – which could be part of why your reported taxable income is so low.
This is not a call to change whatever you’re doing; rather I would like you to pause, evaluate where you are and where you’re going, and then decide what to do. Decisions like this should not be made in a vacuum, hiring a Planner to show you some retirement and life after you’re gone for your child(ren) projections would be worth the money invested.