Social Security Matters

Ask Rusty – Paying Income Taxes on Social Security Benefits

Dear Rusty: I understand that after I reach full retirement age, I no longer have a limit on how much I earn. I retired one year early (65), and am now 76, but I am still being taxed on a portion of my SS benefits. I am not working and making extra money. However, my wife is still working, and I get two small annuities per month. But when I file income tax I am told we made enough for me to be taxed on a portion of my Social Security benefit. I even checked to see if filing married but separate returns would help and it was not as good as joint returns. So maybe you can explain this to me. Signed: Taxpaying Senior

Dear Taxpaying Senior: I’m afraid you’re speaking of two different things. You are correct that once you reach your full retirement age there is no longer a limit on how much you can earn from working before your monthly Social Security benefit is reduced. But that is something totally different from paying income tax on your Social Security benefits.

Social Security’s “earnings limit” looks only at your earnings from employment (or self-employment) to decide if they should take back some of your benefits before you reach your full retirement age. However, whether or not your Social Security benefits are taxable income is determined by your “combined income,” which includes your adjusted gross income as reported to the IRS, plus any non-taxable interest you may have had, plus 50% of your total Social Security benefits for the tax year. This is often referred to as your “modified adjusted gross income” or “MAGI” and it’s how the IRS determines if, or how much, of your Social Security benefit is taxable income. As a couple filing your income taxes as “married – filing jointly” if your MAGI is over $32,000 then up to 50% of your annual Social Security benefit amount is taxable, and if your MAGI is over $44,000 then up to 85% of your Social Security income becomes taxable. Note that the combined income levels are different, and lower, when you file your taxes individually.

The “earnings limit” is a rule imposed by Social Security to recover some benefits paid if the limit is exceeded due to your earnings from working. Taxation of Social Security benefits is done by the IRS (not Social Security) and it’s the IRS who determines if your Social Security benefits will add to your income tax burden. And while the Social Security earnings limit goes away once you reach your full retirement age, there is no such relief from the IRS at any age when it comes to paying income tax on your Social Security benefits.

Ask Rusty – Confused About Survivor Benefits

Dear Rusty: My husband passed away in 2013 just a few days short of his 63rd birthday. I was 56 at the time and when I went into the Social Security office to notify them of his death I was told I would be able to get a partial draw when I turned 60. Two years after that I was told that I would never draw anything from his account as the rules had been changed, and since he had never drawn Social Security that his benefits were eliminated. I am 62 and intend to keep working but any information you have might be helpful. Signed: Confused Survivor

Dear Confused Survivor: You’ve certainly been given some conflicting information, so I’ll try to clarify. If your husband had accumulated enough quarter credits to be eligible for Social Security, you are eligible for a survivor benefit even if your husband was not yet collecting Social Security (SS) benefits when he passed. To be eligible for SS, your husband would have needed to work for about 10 years for an employer which participated in Social Security program (meaning, both your husband and his employer paid SS FICA payroll taxes on his earnings). Most U.S. employers participate in the Social Security program. However, if your husband worked his entire career as an employee of a state or local government which does not participate in SS, or if he worked for the Federal government under their “CSRS” program, or if he worked for any other entity which didn’t participate in Social Security, he may not have had enough SS credits to be eligible. But if he contributed to Social Security for at least 10 years and had at least 40 credits (can earn 4 per year) then he would have been eligible for SS, and you would be eligible for a survivor benefit from his record.

The rules haven’t changed for any of this. If your husband was at least eligible for SS (not necessarily collecting), you became eligible for a survivor benefit at age 60 although it would have been reduced by about 28.5% from what you would get at your full retirement age (FRA). You are still eligible for the survivor benefit but, if you take it now at age 62, it will still be reduced for claiming before your FRA, and since you are still working you’ll also be subject to Social Security’s earnings limit ($17,640 for 2019). If you exceed the earnings limit, SS will withhold from future benefits $1 for every $2 you are over the limit, which would mean you wouldn’t get benefits for some months until they recover what is due. If your current earnings are high, it may not be prudent to claim early SS benefits even if you’re entitled to them. The earnings limit changes annually, is considerably higher (by 2.5 times) in the year you reach your FRA and goes away once your reach your full retirement age.

For your awareness, the survivor benefit reaches the maximum amount when you reach your full retirement age (but is reduced if you claim it earlier). You have the option to restrict your claim to survivor benefits only, and you may want to do this if your own SS benefit from your lifetime earnings record will be more at age 70 than your survivor benefit will be at your FRA. Your goal should be to collect the highest benefit possible for the rest of your life. If you so choose, you can collect your survivor benefit first and delay your own SS benefit past your full retirement age, which would allow you to earn delayed retirement credits on your own benefit. That will increase it by 8% per year of delay, up to age 70 when your maximum Social Security retirement benefit will be reached, and at that time you would switch to the higher benefit.