MANAGING MONEY : Divorced Spouse Has Right to Share in Ex-Mate’s Social Security Benefits

QUESTION: Although I am divorced, I was married for more than 20 years and am therefore entitled to draw Social Security benefits based on my ex-husband’s earnings. However, if he dies before he applies for Social Security, am I still entitled to apply for my share of his benefits?--M. W.

ANSWER: Yes, even if your ex-husband dies before applying for Social Security, you are entitled to receive benefits as a “divorced spouse.” To qualify as a divorced spouse, a person must have been married at least 10 years.

Interestingly, the Social Security Administration will award full divorced spouse benefits to every former spouse of a person--so long as they were married at least 10 years--regardless of the number of times the deceased was married. The benefits are not shared or reduced because a person leaves more than one ex-spouse.

The actual benefits paid to divorced spouses are determined according to a complicated formula that takes into account the age of the divorced spouse, whether the deceased had drawn any benefits and whether any minor children are entitled to benefits. In addition, a divorced spouse is entitled to receive either his or her own benefits or the deceased person’s benefits--whichever are higher.

Q: Last week you talked about parents helping their adult son buy a house. You said the parents could deduct their pro rata share of the interest and property taxes from their income because their share of the child’s house qualifies as their second residence. But what about their son? Will he be able to treat his half of the house as a primary residence and deduct his half of the interest and property taxes? Will he be able to roll over any gain he receives from the sale of his previous home, to which he has 100% title, to a home in which he has a 50% title?--M. R. V.

A: Let’s answer this in two separate parts. First of all, Gary Kuwahara, a Torrance certified public accountant who handled the initial question, says the son is entitled to deduct his pro rata share of the mortgage interest and property tax payments on his income taxes. The percentage of the payments deducted must equal the ownership share in the residence.

It’s a trickier matter to roll over profits from a home that a person owns entirely to one in which there is only partial ownership.

Let’s assume that the son and his parents are sharing equally in the purchase of a new home and that the son will be applying profits gained from the sale of another home in which he held 100% ownership. According to Kuwahara, in order for the son to avoid a tax liability on the profits from the sale of the first house, the value of his 50% share of the new house must at least equal the full sales price he received. In other words, the purchase price of his new home must be at least twice what he received for his first house to avoid a tax liability on the profits.

Q: I understand that if you work for a company with a retirement plan, you are probably ineligible to receive the full tax deduction for contributing to an individual retirement account. However, I am now working full time for a small company that has no retirement plan. But they do have what they call a profit-sharing plan. Two separate accountants have given me conflicting answers as to whether this plan disqualifies me from an IRA investment deduction. The Internal Revenue Service also gave conflicting answers. Can you help?--E. C. H.

A: We’ll try to sort this out, but you may still want to consult an accountant or attorney specializing in retirement plans. We checked with Ellen Marshall, an IRA specialist in the Costa Mesa office of the law firm of Morrison & Foerster, who said that whether or not you can take an IRA deduction depends on the nature of the profit-sharing plan established by your employer.

According to Marshall, some profit-sharing plans are actually a form of retirement plan that merely goes by the name of profit sharing. Others--typically those plans paying bonuses tied directly to the company’s performance--are genuine profit-sharing operations. Marshall said the basic distinction is whether the profit-sharing plan meets the qualifications of a “qualified retirement plan” established in Section 401(k) of the Internal Revenue Code. If your profit-sharing plan meets these criteria, chances are very strong that the plan is a qualified retirement plan and that you are not allowed to take the full tax deduction for an IRA contribution.

Just another note. Even if your profit-sharing plan is judged to be a qualified retirement plan, you may still be able to take full advantage of the IRA deduction. Single taxpayers with adjusted gross income up to $25,000--or $40,000 if married and filing a joint return--can deduct the full amount of their IRA contribution even if they are covered by a qualified retirement plan.