As long as the federal Social Security program remains in effect, you need to take into account all the factors that will affect your monthly payment when planning your retirement. Earned income, pensions, annuities and dividends from other investments play an integral role in how comfortable you’ll be in retirement. One of the benefits of building an investment portfolio prior to retirement is that dividends from those investments are not counted against your Social Security payments unless you apply for disability benefits.
Earned income is reported by your employer and includes wages, tips, bonuses and salaries. Income that you earn by providing services while you’re collecting Social Security also is considered earned income and must be reported as such. Other income such as dividends, pensions, capital gains, interest and annuities is not earned income and do not affect your social security payments. They are, however, reported on your tax returns as capital gains.
Earned income is the only payment that affects the amount of Social Security you receive. Once you’ve reached full retirement age, however, even those funds don’t affect your retirement benefit. You have no limit on your earnings after reaching the full retirement year determined by your date of birth. If you take early retirement, you can earn up to a specified amount, which can change from year to year. For example, in 2012, the most you could earn before it affects your social security payment is $14,640. You lose $1 of your benefit payment for every $2 you earn over the limit.
Dividends, pensions and annuities must be reported as income on your Social Security application when you apply for disability benefits. To determine your monthly benefit, Supplemental Security Income, also known as SSI, is calculated by adding up all the income you receive. The SSI program is a benefit administered by the Social Security Administration for people with limited income and resources. It is available to the disabled and the blind. SSI differs from Social Security payments in that it is not based on previous work history.
Dividend payments are income and must be reported on your income tax return. While you don’t have to file a separate schedule 1 with your 1040A form, you still must report the income on your 1040. Liquidating dividends you receive from the dissolution of a corporation also must be reported when the income exceeds your original investment. Qualified dividends paid from the profits of a company in which you’ve invested also must be reported on your 1040 tax filing form even when you collect Social Security. Those earnings are part of your capital gains income that is taxed at the same rate as your other capital gains.
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