The money that counts as earned income for Social Security purposes depends on which government agency you are dealing with. The Social Security Administration defines earned income one way to determine how it affects your benefits. The Internal Revenue Service has a different definition for income tax purposes.
Earned Income and Early Benefits
The Social Security Administration only counts money you earn at a job and net earnings from self-employment as earned income. Investment and interest earnings aren’t included. You also don’t include other pensions, government benefits or annuity payments. Tax-deductible contributions to retirement plans count if they are part of your gross pay as an employee or net earnings from self-employment .
You can start Social Security benefits when you turn 62, but your earned income can result in a reduction in the amount of your benefit when you take benefits before full retirement age. Full retirement age for people retiring in 2012 and 2013 is 66. As of 2012, if you are getting benefits before full retirement age, your Social Security benefit is reduced by $1 for every $2 you earn over $14,640. As of 2013 the threshold increases to $15,120. Once you reach full retirement age, this rule does not apply -- there is no benefit reduction no matter how much you make. Also, the money you lose from these benefit reductions eventually comes back to you, because your benefit amount after you reach full retirement age is increased to compensate.
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Taxes, Income and Benefits
If your income other than Social Security is large enough, some of your benefits are taxable under IRS rules. For the purpose of figuring out if your benefits are taxable, include earned income from work and self-employment. In addition, earned income from foreign sources, foreign housing, and income earned as a resident of Puerto Rico and American Samoa are included. You also have to count taxable investment and interest earnings, nontaxable interest, interest on qualified U.S. savings bonds, and any adoption credits provided by your employer. The total is called your modified adjusted gross income.
To determine if some of your Social Security is taxable, the IRS says to add half of your annual benefit amount to your modified adjusted gross income. If you are married, file a joint return, and the total is more than $32,000, at least 50 percent of your benefits are taxable. For single filers, the limit is $25,000.
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