Military Spouse Finances 201: Are You Subject to WEP?Retirement Funding Taxes
It seems to me that a significant percentage of military spouses are teachers. It may just be my perception. If you were a teacher at some point during your military adventure, you may be subject to the Windfall Elimination Provision (WEP) when you file for Social Security.
What is WEP?
WEP is essentially a different formula used to determine your earned Social Security benefit. The effect of the different formula is to reduce your Social Security benefit from what the normal formula would provide.
Why Am I Subject to WEP?
When Social Security was started, state governments were allowed to opt out of Social Security for state employees (Federal government employees were treated the same, but that ended years ago). Many states, and the District of Columbia, have opted out of Social Security. Since teachers can be state employees, if you taught over the years and didn’t pay Social Security taxes, WEP could apply to you.
The reason that WEP was developed was due to the way Social Security benefit is calculated. As part of the calculation, Average Indexed Monthly Earnings (AIME) are determined. If you had earnings not subject to Social Security tax, your AIME will be lower than if those earnings were subject to Social Security taxes. And here’s the rub. You get a greater percentage of lower AIME (to be specific, you get 90% of the first $1,115 of AIME). Under WEP, the percentage on the first $1,115 of AIME is reduced to as low as 40%.
How Do You Avoid WEP?
There are some exceptions, but many of them have aged out.
You can also avoid WEP if you have 30 years of substantial earnings on which you did pay Social Security taxes. Substantial is a relative word and substantial earnings are relatively low. For example, in 2023 $29,700 for the year is considered substantial earnings.
Watch Out for GPO Too
If your teacher's or other government job on which you didn’t pay Social Security taxes on pays you a pension, your spouse and survivor Social Security benefits could be reduced. See the article below for further details.
Military Finances are Different
WEP applies to anyone who worked for a state and didn’t pay Social Security taxes. That isn’t always the case when it comes to active and retired Senior Military Officers and NCOs. There are a lot of tax benefits and financial issues that are unique to you. That’s why we think you should work with a Financial Planner/Advisor that focuses on servicemembers and veterans each and every day. If you’d like to find out how we do things, use the button below to schedule a free initial consultation.
If you found this article useful, you might like the following blog posts:
Potential Retirement Surprise Waiting for Some Military Spouses: GPO
Retired Military Finances 101: What You Need to Know About Social Security
Military Finances 201: Take Social Security Early and Invest It?