Social Security benefits are a solid means of support for millions of retirees. When economic weakness and low interest rates sap the income-producing power of some of your assets, Social Security payments are a financial resource upon which you can rely during difficult times. Also, Social Security benefits, like stocks and bonds or a well-stocked bank account, can help you realize your retirement dreams. Be aware, however, that your benefits may be reduced for a number of reasons:
Effects of Full and Early Retirement on Benefits
When you apply for Social Security retirement benefits, the amount of those benefits is determined in part by the full retirement age that is set by the Social Security Administration for someone born in your year of birth. A second determinant is your actual age when you apply for those benefits. A third factor is the number of months between the day you applied for early retirement and your full retirement age.
If your full retirement age is 66, and you retire at 66, you’ll receive your full, monthly Social Security benefits. If, however, you take early retirement at age 62, or any time thereafter but before your 66th birthday, your benefits check will be as little as 70 percent of the full benefits.
Earned Income and Benefits
The Social Security Administration applies the earnings test to "earned income" only. Earned income includes commissions, bonuses, salaries, severance pay and other employer payments. But if you're self-employed, earned income includes your company's profits. Earned income excludes investment income, capital gains, pension income and annuity payments.
Read More: Earned Income While Drawing Social Security
Federal Income Tax and Benefits
Federal income tax might reduce the amount of Social Security benefits that you receive. Two factors that determine whether you owe federal tax on your benefits are your combined income and the income thresholds which are set by the Internal Revenue Service.
2020 Income Thresholds: If you file an individual tax return and earn more than $25,000 per year, your Social Security benefits may be taxed. For those who file a joint return, the income threshold is $32,000.
- When filing an individual return, if your combined income is between $25,000 and $34,000, 50 percent of your Social Security benefits may be taxed.
- If you file an individual return and your combined income is greater than $34,000, as much as 85 percent of your benefits are taxable.
- When you file a joint return, if your combined income is between $32,000 and $44,000, about 50 percent of your Social Security benefits may be taxed.
- If you file a joint return and your combined income is more than $44,000, 85 percent of your benefits are subject to federal tax.
Read More: How Do Income Taxes Work?
State Income Tax and Benefits
State income tax may also reduce the Social Security benefits that you receive. Thirteen states tax Social Security benefits. Some tax your benefits in their entirety and others tax a portion of them according to your age or income level.
Twenty-six states either exclude Social Security benefits from taxable income or impose no state tax. Twelve additional states tax your benefits but exempt that portion of your benefits that are taxed at the federal level.
Visit TaxAdmin.org and search for your state to learn more about your state’s tax code.
Medicare Part B Premiums
Retirees who enroll in Medicare Part B pay a monthly premium for coverage. Medicare bases your premium on your income.
For instance, in 2020, if you file a single return and your income is $87,000 or less, or a joint return and your income is $174,000 or less, you will pay a standard Part B monthly premium of $144.60. If, however, you file a single return and your income is $500,000 or more, or you file a joint return and your income is $750,000 or more, your premium is $491.60.
Once you enroll in Part B, Medicare’s administrator, the Centers for Medicare and Medicaid Services (CMMS), can deduct the premium automatically from your Social Security benefits payment. If you prefer, the CMMS can bill you.
Overpayment of Benefits
If Social Security overpays your Social Security benefits, the agency will notify you. The agency will alert you to your repayment options, and your appeal and waiver rights. The agency will then withhold the full amount of your benefit each month, unless you ask that a lesser amount be withheld.
Garnishments and Benefits
The Social Security Administration identifies the following instances for which your Social Security benefits may be garnished:
- Enforcement of child, spousal or family support obligations
- Court-ordered victim restitution
- Collection of unpaid federal taxes
- Withholding to satisfy a current year federal income tax liability
- Non-tax debt owed to other Federal agencies according to the Debt Collection Act of 1996 (Public Law 104-134).
Social Security benefits provide financial support for millions of retirees. Social Security payments are a financial resource upon which you can rely, but be aware, however, that you might see your benefits reduced for several reasons.
- Social Security Administration: Retirement Benefits (July 2020)
- Internal Revenue Security: Earned Income Tax Credit Income Limits and Maximum Credit Amounts
- Tax Foundation: State Individual Income Tax Rates and Brackets for 2020
- Social Security Administration: Definitions Deductions
- Medicare.gov: Part B Costs
- CMS.org: Medicare
- Social Security Administration: Overpayments
- Social Security Administration. "Your Retirement Benefit: How It's Figured." Accessed Feb. 20, 2020.
- Social Security Administration. "Workers with Maximum-Taxable Earnings." Accessed Oct. 15, 2020.
- Social Security Administration. "Benefit Calculation Examples for Workers Retiring in 2020." Accessed Feb. 20, 2020.
- Social Security Administration. "Primary Insurance Amount." Accessed Feb. 20, 2020.
- Social Security Administration. "Benefits Planner: Retirement | If you were born between 1943 and 1954." Accessed Feb. 20, 2020.
- Social Security Administration. "2021 SOCIAL SECURITY CHANGES." Accessed Oct. 15, 2020.
- Social Security Administration. "How Work Affects Your Benefits." Accessed Feb. 20, 2020.
- Social Security Administration. "Benefits Planner, Income Taxes and Your Social Security Benefits." Accessed Feb. 20, 2020.
Billie Nordmeyer is an IT consultant of 25 years standing. As a senior technical consultant for SAP America and Deloitte Touche DRT Systems, a business analyst, senior staff, and independent consultant, Billie has worked across the retail, oil and gas, pharmaceutical, aeronautics and banking industries. Billie holds a BSBA accounting, MBA finance, MA international management as well as the Business Analyst and Software Project Management certificates from the Cockrell School of Engineering at the University of Texas at Austin.