When should I start applying for Social Security?

Dear Liz: I’m 59. In 8 years, I will qualify for an average Social Security income. I have no retirement saved and am not a homeowner but I have been blessed with a modest inheritance. What financial advice would you give in this situation?

Answer: The most powerful action you can take for your future retirement is to delay your Social Security application as long as possible, preferably waiting to apply until your benefit maxes out at age 70.

Each year you delay after your full retirement age of 67 will add 8% to your checks — a guaranteed return that can’t be matched anywhere else. You also don’t have to worry about missing out on inflation adjustments, since those are added into your benefit starting at age 62 whether or not you’ve applied.

Applying early stunts your benefit for life. The longer you live, the more likely you are to run through your other savings, so a maximized Social Security benefit is the ultimate longevity insurance.

If you’re married and the higher earner, your benefit also determines what the survivor will get after the first spouse dies.

Other smart moves would be to start saving what you can for retirement and get your inheritance invested properly, so that your money continues to grow. Consult a fee-only financial planner or an accredited financial counselor for help.

Dear Liz: Because of the Social Security Fairness Act, my wife got a huge lump sum check (catchup, I suppose) and will now get monthly Social Security benefits. This is good news and bad news, especially if we get kicked into a higher tax bracket and moreover if we have to pay taxes on that lump sum. Is there anything in the wings at the IRS that will provide some guidance as to the taxable or nontaxable (ha-ha) nature of that lump sum?

Answer: Taxes on Social Security are typically based on your “combined income” for the year. Combined income is your adjusted gross income plus any tax-exempt interest and half your Social Security benefit. If you’re married filing jointly and your combined income is between $32,000 and $44,000, you typically would pay tax on up to 50% of your benefits. If your combined income is over $44,000, you would pay tax on up to 85% of your benefits.

Normally, a lump sum for back benefits would be taxable in the year it was paid out, but there is an option called the Social Security lump-sum election method, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. You can elect to calculate the taxes as if you received the benefits in the year they were due.

You’ll find worksheets in IRS Publication 915 to help with your calculations. Essentially, you’ll determine what portion of the lump sum payment would have been taxable in each prior year. You’ll subtract any previously reported taxable benefits, then add the remainder to your current year’s taxable income, and check line 6c on Form 1040 or 1040SR, Luscombe says.

Dear Liz: You recently answered a reader whose check to the U.S. Treasury had been stolen and forged to another recipient. You suggested sending electronic checks instead. However, our accountant gives us forms that I thought needed to be included with a paper check to ensure the correct accounting of our taxes. Can we just send a check from our bank with the last four digits of our SSNs in the memo field?

Answer: It’s unfortunate your accountant hasn’t walked you through the relatively simple process of paying your taxes online. The electronic systems match your payment with your return. You only need to send in paper forms or vouchers if you’re also sending paper checks.

And you shouldn’t be sending checks in the mail if you can possibly avoid it. Given the surge in mail theft and check fraud, it really is past time to switch to electronic payments.

Liz Weston, Certified Financial Planner®, is a personal finance columnist. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com.