If you are looking forward to retirement and tax-free Social Security income, you might be surprised when the IRS comes around for a bite. Yes, way back when Social Security was a young program, President Franklin D. Roosevelt promised no income taxes would be exacted, but that promise ran out in the 1980s for some people whose income exceeds certain levels.
Now the federal government considers the retirement entitlement as taxable income when your other income plus half of your Social Security exceed an amount based on your filing status ($32,000 if you filed jointly, $25,000 for single filers). First, only 50 percent of your benefit above a certain threshold is taxable. When you exceed the first threshold, up to a maximum of 85 percent of your benefit can be taxed.
You can continue to work and still receive retirement benefits. Your earnings in (or after) the month you reach your full retirement age will not reduce your Social Security benefits. But your benefits will be reduced if your earnings exceed certain limits for the months before you reach your full retirement age.
If you work for someone else, only your wages count toward Social Security’s earnings limits. If you are self-employed, the federal government counts only your net earnings from self-employment.
Income from other sources is not counted, such as other government benefits, investment earnings, interest, pensions, annuities and capital gains.
If you work for wages, income counts when it is earned, not when it is paid. If you have income that you earned in one year but the payment was made in the following year, it should not be counted as earnings for the year in which you received it. Some examples are accumulated sick or vacation pay and bonuses.
If you are self-employed, income counts when you receive it—not when you earn it—unless it is paid in a year after you become entitled to Social Security and earned before you became entitled.
Now is a good time to have Grant Davis review your social security and retirement plans. The world changed in the last 5 years, I can help make sure you have a plan, and understand where you will be when you are ready to retire.