Social Security benefits can be complex to calculate and understand for almost anyone who doesn’t work at Social Security or do this every day.
And the bottom line impact can be huge in terms of cash flow and potential tax liability.
Special Rule for 1st Year Retirees
You may be interested in knowing that there is a special rule for the first year you retire.
Sometimes people who retire during a year already have earned more than the yearly earnings limit. That is why there is a special rule that applies to earnings for one year, usually the first year of retirement. Under this rule, you can get a full Social Security check for any whole month you are retired, regardless of your yearly earnings.
So for the months that you did not work or earn less than the maximum, you will receive your full benefit but not have the SSI benefit reduced. If you are retired and under Full Retirement Age, you are considered “retired” if your earnings are under $1,180 for that month and are not for all intents and purposes performing work as “self-employed”.
And the earnings test is limited to earned income above $14,160 in a year. This number does not include dividends, interest, capital gains or IRA distributions. Only if your earned income is above the limit will there be a reduction of benefits ($1 less in benefits for every $2 earned above).
In the year that you reach your Full Retirement Age (FRA) which is also known as Normal Retirement Age (NRA), the calculation is a little different. Benefits are reduced $1 for every $3 earned above a different limit. If you were born between in 1945 or 1946, your FRA is 66 and that limit is $37,680.
Taxing Social Security Benefits
Now taxation of benefits is a different issue. During the last tax season, I had a few individuals who came in and didn’t realize that their benefits needed to be reported on their taxes. They were more than shocked when they found out that their benefits were taxable and the refund that they thought they were getting was never going to happen.
Everything is added in including municipal bond income (which is otherwise and usually non-taxable). Then up to 85% of SSI benefits may be taxed at your current rate if it is above certain exemption limits. These start around $25,000 for a single taxpayer and around $32,000 for joint filers.
If you are married filing separately, you will likely be subject to taxes on the benefits without the help of an exemption.
To avoid a surprise when you file your taxes, you may want to get help in calculating your potential tax liability. And if necessary file a Form W-4V to have a portion of your benefits withheld to defray your tax liability.
For more specific help with financial planning issues related to this or other issues or help in preparing your taxes, please call or email me and we can arrange to help.