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Author: blacktreechaser Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121095  
Subject: Inflating earned income for more FICA credits ? Date: 6/29/2011 12:24 PM
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Someone is age 27 and self-employed. Main occupation is making a product and selling it directly to the customer, working out of the house, sometimes dealing only in cash. Yes, its a legal product, no drugs involved.
Self-employed income for 2010 was not enough to maximize Social Security credits. So, is it better to report a higher income on the tax return to maximize the Social Security credits? I'm assuming Social Security will still be around when this person becomes of age to collect, with no reduction in benefits.
The main disadvantage would be paying more in income taxes, but that would be a small amount. A minor disadvantage would be if there was an audit (highly unlikely) and the auditor wants to see paperwork to back up the reported earned income. However, I don't think anyone ever got in trouble for over reporting income, unless it was done for money laundering, which would not be the case here.
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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113611 of 121095
Subject: Re: Inflating earned income for more FICA credit Date: 6/29/2011 12:33 PM
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Rather than inflate your income, take a look at the optional method for calculating your self-employment tax. It is provided to deal with just this situation.

It calculates your SE tax based on your gross sales rather than your net income. There are some limitations on this method, so be sure to read through the instructions for Schedule SE.

--Peter

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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113612 of 121095
Subject: Re: Inflating earned income for more FICA credit Date: 6/30/2011 12:24 AM
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I don't think anyone ever got in trouble for over reporting income, unless it was done for money laundering

Au contraire, as we say in Kansas. Fraud is fraud. What you propose is a too common tactic of tax cheats trying to maximize the earned income credit, and the IRS is well aware of it.

Phil
Rule Your Retirement Home Fool

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113613 of 121095
Subject: Re: Inflating earned income for more FICA credit Date: 6/30/2011 1:08 AM
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I don't think anyone ever got in trouble for over reporting income, unless it was done for money laundering
-----
Au contraire, as we say in Kansas. Fraud is fraud. What you propose is a too common tactic of tax cheats trying to maximize the earned income credit, and the IRS is well aware of it.


could they legitimately get 'higher' income by not claiming some business expense?

eg, working out of the home they may deduct part of rent,utils (yes?), but MUST they?

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Author: foo1bar Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113614 of 121095
Subject: Re: Inflating earned income for more FICA credit Date: 6/30/2011 3:02 AM
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What you propose is a too common tactic of tax cheats trying to maximize the earned income credit, and the IRS is well aware of it.
Is it just me that thinks this it's a bizarre thing for the IRS to get less money as you earn more?

I have to wonder how they could really prove that someone over-reported their income... It's not like you can easily prove that someone didn't take in an extra $3K in cash.

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Author: loopholes One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113621 of 121095
Subject: Re: Inflating earned income for more FICA credit Date: 6/30/2011 6:24 PM
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leaving aside the serious issue of misstating one's income on a tax return, I don't see the economic rationale for doing what you suggest.

Earnings from 2011 may never even factor in to the calculation of retirement benefits a person, currently 27 years of age, will ultimately receive. A 27 year old person has at least 40 working years ahead of him. His benefit will be calculated in 2051, and if current rules still apply, will be based on his 35 highest earning years, with income in earlier years adjusted for inflation.

You're suggesting voluntarily (and artificially) increasing tax due and payable in 2011/2012, without a corresponding increase in actual earned income, in order to inflate a reported earnings number that (1) may be excluded in determining SS benfits, (2) may be one of 35 inflation adjusted numbers equally weighted in the formula, or (3) may be of unknowable significance because we have 40 years of possible changes to the way benefits are calculated between now and then.

Consider, instead of inflating reported earned income and paying extra income/wage taxes, putting an amount equal to the additional tax that would have been due into a Roth IRA or other tax advantaged retirement saving account for self-employed persons, and investing it for the 40 years until he becomes SS eligible. If it eventually turns out that his SS benefit is not the max because of relatively low earnings in 2011, he can likely self-fund the difference by drawing down this account.

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Author: 0x6a74 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113622 of 121095
Subject: Re: Inflating earned income for more FICA credit Date: 6/30/2011 11:00 PM
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Consider, instead of inflating reported earned income and paying extra income/wage taxes, putting an amount equal to the additional tax that would have been due into a Roth IRA or other tax advantaged retirement saving account for self-employed persons, and investing it for the 40 years until he becomes SS eligible. If it eventually turns out that his SS benefit is not the max because of relatively low earnings in 2011, he can likely self-fund the difference by drawing down this account.


though i entirely agree.. 40 yrs might be optimistic (at 27, i only had 30 yrs of work ahead (many of them with near-zero earnings)

AND .. when i tried to calculate the 'earnings' (ROI?) on my FICA taxes, it came out very close to the S+P over those years ( so putting extra into a Roth, investing in index fund, likely to make OP even better off)


=

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113623 of 121095
Subject: Re: Inflating earned income for more FICA credit Date: 7/1/2011 9:52 AM
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Although the OP doesn't provide enough information, the main issue here my not be a better return on invested vs future Social Security dollars....it may be Social Security eligibility, which not only would have to do with eligibility for a SS benefit, but also for Medicare.

Social Security retirement benefits eligibility on one's own work record requires 40 'good quarters', a kind of cliff vesting scheme. Most do not have a problem meeting this over their working years...but a few may, due to any number of personal factors.

BruceM

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Author: bookie71 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 113624 of 121095
Subject: Re: Inflating earned income for more FICA credit Date: 7/2/2011 1:05 PM
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You might want to check out the optional self employment calculation, you can often get more credits without haveing to fudge your gross income.

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