Social Security is a supplemental retirement income program run by the federal government. The idea is simple. While you are working, you pay money into the Social Security system in the form of FICA tax. When you retire, you get a monthly income check from the Social Security system. Social Security is full of political controversy, and we aren’t interested in that here. This is about personal finance and your actual retirement plan, not about what should or should not be according to someone.
Social Security While Working
Once upon a time, 65 years old was the mandatory retirement age in many fields. In addition, most people didn’t live much past 65. These days, plenty of people live long past 65 years old, and plenty of people also work long past the age of 65. This introduces some new wrinkles to the Social Security program.
First, with people living longer, Social Security was paying out more benefits than it used to. So, Congress passed a law that changes the retirement age for Social Security.
If you were born between 1943 and 1954, your full retirement age is 66 years old, not 65. You can start collecting Social Security retirement benefits as young as 62 years old, however your benefit amount will be reduced. For example, if you start collecting Social Security at age 62, you will only get 75% of the full benefit amount you would get if you waited to start collecting until age 66.
Reduced Social Security Benefit While Still Working
What if you are still working when you start collecting Social Security? If you are still employed when you start taking Social Security, your benefit payment may be reduced.
First, if you are full retirement age (age 66 if you were born between 1943 and 1955), then you get to keep your entire Social Security benefit amount even if you are still working. There is no reduction based on income for people who have already reached full retirement age, no matter how much money you make.
Now, if you are not at full retirement age, your Social Security can be reduced depending upon how old you are, and how much you make.
If you make more than $15,480, then your Social Security is reduced by $1 for every $2 you earn above $15,480. This is best understood with examples.
- If you make less than $15,480, then your Social Security is not lowered by any amount. You get to keep the full benefit.
- If you make more than $15,480 then you lose $1 for every $2 ABOVE $15,480.
- So, if you make $30,000 and you qualify for a $900 per month Social Security payment ($900 * 12 = $10,800 for the year)
- $30,000 – $15,480 = $14,520 (this is the amount you make over the threshold)
- You lose $1 for every $2 over $15,480, or $7,260 ($14,520 / 2)
- Your paid benefit is $10,800 – $7,260 = $3,540
The way you lose the money is odd. They don’t calculate your new amount and then change your monthly payment. Instead, they do not pay you until you have paid off your reduction.
In our example, you would normally receive $900 per month for 12 months. Instead, since your benefit is reduced, they just won’t pay you for the first eight months of the year. Then, you’ll get $800 per month for the rest of the year. If your reduction means that you would get a partial month of payment, you will NOT get paid for the partial month right away. Instead, they’ll carry forward any fraction and pay you that amount in January of the next year.
The rules are different during the year you actually reach full retirement age in which case, the reduction is $1 for every $3 you earn above $41,400 until your birthday. In other words if you turn 66 in September, your reduction would be based upon the above from January to September, then in October, you would get your full benefit. (You still get the lower benefit from starting early, but no reduction based upon income.)
As you can see, if you are still earning much of an income, it probably doesn’t make sense to start taking your Social Security early without a very good reason.
Taxes On Social Security
Paying income taxes on Social Security is different. It does not matter how old you are, or if you have reached full retirement age, if you are still working, your total income may make some or all of your benefit taxable.
If you are married filing joint and your income is lower than $32,000 then your Social Security payments are not taxable.
If you are married filing joint, and your income is between $32,000 and $44,000 then up to 50 percent of your benefits is taxable.
If you are married filing joint and your income is over $44,000 then up to 85 percent of your Social Security benefits are taxable.
Note, this is not the tax rate you way. It does not mean that you pay 50% tax (or 85% tax) on your benefits. It means that much is considered taxable at your normal income tax rate (with the additional income added.)
In other words, if your combined income is $60,000 and you get a $1,000 per month benefit, then 85 percent of $12,000, or $10,200 is taxable. You’ll pay your usual tax rate on an extra $10,200 of income.
Calculating your “combined income” to see where you fall in the above income levels includes one-half of your Social Security income.
So, if you make $28,000 per year at a job, and then you get $1,000 per month ($12,000 per year) in Social Security, then your combined income is $25,000 + $6,000 (1/2 of $12,000) = $34,000 and 50% of your benefit is taxable.
As always, a program like TurboTax or an accountant can do the actual math for you.
Information in this article is for educational and planning purposes only. It is not tax advice. Consult a tax professional for actual tax advice on your specific situation.
