Below is a post from the Boston Tax Institute (May 31, 2011) from Kurt Czarnowski, formerly with the SSA as Regional Communications Director in New England. Kurt presented to the Merrimack Valley Estate Planners Council, one of my groups a while ago and always had a knack for making the complex and dry information from Social Security enlightening and fun.
Unfortunately, many people do not completely understand how work and earnings impact a person’s ability to collect Social Security retirement benefits. As a result, they may be losing out on monthly payments which are rightfully theirs.
The good news is that the Senior Citizens’ Freedom To Work Act of 2000 eliminated the Social Security annual earnings limitation beginning with the month a person reaches Full Retirement Age (FRA). (From 2000 through 2002, FRA was age 65. However, in 2003, it began increasing, so that FRA is now age 66 for people born between 1943 and 1954.)
This means that if you are at Full Retirement Age or older, and you work, you can receive a full monthly Social Security benefit, no matter how much you earn. In addition, any earnings you may have had prior to the month you reach your FRA do not impact your ability to collect benefits from FRA going forward.
But, if you are under FRA, there is still a limit on how much you can earn and still receive full Social Security benefits. In 2011, the annual limit is $14,160, and if you are younger than full retirement age during all of 2011, you lose $1 in benefits for each $2 you earn above that amount.
If you retire in mid-year, you already may have earned more than the yearly earnings limit, but that doesn’t mean you can’t collect benefits for the remainder of the year. There is a special rule that applies to earnings for one year, usually in the first year of retirement. In 2011, this rule lets you collect a full Social security check for any month your earnings are $1,180 or less, regardless of the yearly earnings total.
It is important to note that if some of your retirement benefits are withheld because of your earnings, these payments are not completely lost. Starting at your full retirement age, your benefit amount will be recalculated, and it will be increased to take into account those months in which payments were withheld.
One thing that I will add here is that I have seen first hand the problems that can occur when folks do not understand the rules.
As a registered tax preparer with XtraRefunds, I have had several folks come in to have us prepare their taxes. They invariably have had false information about Social Security benefits.
I had one case where an individual came to me as a new client. During the initial intake he failed to answer certain questions. Although he was over age 65, he was still working a full-time job and running a small business on the side. Only after we had completed the return, did he happen to mention that he was receiving Social Security benefits but he had no paperwork (1099-R or annual benefits statement for instance).
When we finally got the paperwork from SSA and inputted the amounts, his tax status changed considerably from a refund to a liability. This was because a portion of his benefits were taxed. Not everyone realizes that up to 85% of Social Security benefits can be taxed when you have a gross income above certain levels.
This example stresses the need for having a trusted adviser to work with before you make major money moves instead of relying solely on what friends and relatives might say.
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