Healthcare COSTS are deductible via itemizing–

As far as I can tell, the purpose of an S corp is to avoid self-employment taxes on part of the income. I wonder if it might not be more beneficial to be a sole proprietor. The self-employed people of my acquaintance (contractors, mostly) pay little tax of any sort because almost everything they do is a business expense. Your insurance deduction might wipe out most of the income from the business.

I specifically asked two Social Security CSRs over the phone and one in person: “Does $14,160 mean adjusted gross income?” “Do you mean after contributions to tax-deferred savings”? “Can we deduct medical costs from that”?

The answer was “no, no, no. We mean gross. Plain old gross.” They explicitly said there was no way out of it: It’s not after-tax, it’s not after mortgage deductions, it’s not after IRAs. It’s what you earn in a given year before you try to weasel out of declaring what you actually earned.

If your coworkers are collecting Social Security and earning a full salary, they probably are over the “retirement age” designated for their cohort. Until recently, this was 65. But for people born around 1945, it’s 66. And the younger you are, the older the “retirement age” is. If you elect to draw Social Security before your “retirement age,” you are restricted to a specific, limited earned amount–in 2009 and 2010, that amount is $14,160. If you exceed that amount, the excess amount is effectively taxed at a 50% rate: 50 cents of every dollar above the allowed amount is taken out of your Social Security benefit.

This would be tolerable if it were just a matter of saying, “OK, I earned $300 too much; here’s a check for $150.” But that’s not how it works. A Social Security CSR told me that as soon as you exceed the earnings limit, SS withholds a benefit check–more than one, if your excess earning exceeds the amount of a single benefit payment. SS figures out how much you owe and returns the remainder to you, but not until the following January.

Suppose, for example, in August you let SS know that teaching three sections in the fall semester will cause you to exceed the earnings limit by $240 (we are told that we are required to notify SS as soon as we become aware that we will exceed the limit). One ENTIRE month’s benefit payment–in my case, a net of something over a grand, the bulk of my month’s income–is withheld. Now several months pass, in which you’d bloody well better have a healthy contingency fund, unless you enjoy dining on cat food. Not until the following JANUARY do you get your withheld check back, minus half of the $240 overrun.

Fair? No. Terrifying? Yes. Aversive? Hell, yes!

After the approved “retirement age,” this restriction goes away. At that point you can earn as much as you want. What you put into an IRA or work-related retirement plan then becomes irrelevant, except as a tax shelter. After “retirement age,” what you earn has no bearing on how you collect your SS benefit. It’s irrelevant, anyway, even before then, because before “retirement age” what counts as “earned income” is your entire gross earned income, not your AGI.

In fact, I have no self-employed income at this time.

Where the college is concerned, my tax lawyer says I’m considered the District’s part-time employee. The district gets to have its cake & eat it, too: it carries adjuncts as employees and gets all the benefits of that, but it doesn’t pass any benefits along to the adjuncts–one of the benefits we don’t get is the ability to call ourselves self-employed and claim the associated tax breaks.

Dividend income is not counted as part of the income that’s limited by Social Security. What counts is money from which FICA and Medicare are withheld. that’s what makes the S-corporation work: it allows me to count a very limited amount of earnings from freelance work toward the earnings limitation and to take part or all of the rest of those earnings as dividends.

I generally itemize and always have, because I have so many sources of income and because some are fairly complex in nature. My taxes are not something I could even think of doing myself.

You are thinking of the tax deduction–I think it’s over 7.5% for health care costs–that is available to all who itemize.

Social Security’s earnings limit is based on gross income. Period. Not adjusted gross income. Every penny you earn, whether you ever see it in your checking account or not, counts as “income” for the earnings limit.

Aside from this (which, in truth, I know nothing about), the “money happens” is great news.