Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about Social Security; specifically, how to know if you can expect to pay taxes on your Social Security and, if so, how much.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “A Simple Way to Maximize Your Social Security” and “7 Things You Should Do Before Claiming Social Security” You can also go to the search at the top of this page, put in the words “Social Security” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.
Today’s question comes from Selfstarter2:
“I heard that if you retire early at age 63 and your spouse still works and is not getting Social Security benefits but makes more than $34,500 annually, your Social Security benefits will be taxed upwards of 50% to 85%. Is this true? And why?”
Selfstarter2 is mixing up a few things in this question: Let’s sort them out and come up with some answers.
Taking Social Security before full retirement age
Your full retirement age is between 65 and 67, depending on when you were born. But you can start Social Security as early as age 62. The catch? If you start early, you’ll get about one-third less than if you wait until full retirement age.
In addition, that benefit could be reduced even more if you take it early while you continue to work.
If you take Social Security early and earn more than $18,240 for 2020, Uncle Sam will reduce your benefit. If you’re under full retirement age for the entire year, he deducts $1 from your benefit for every $2 you earn above that annual limit.
Example: You make $28,240 for the year, exactly $10,000 more than the $18,240 limit. Your Social Security will be reduced by $1 for every $2 you earned, or $5,000.
If you wait until the calendar year in which you will reach your full retirement age, in 2020 you can earn $48,600 a year before your benefits will be reduced. After reaching full retirement age, you can earn as much as you want without any reduction.
Other important things to know:
- These rules apply to wages from working; not investment, pension and other types of passive income.
- This applies only to your earnings, not your spouse’s.
- If your payments are reduced by working, you’ll get the money that was withheld back. After you reach full retirement age, the federal government recalculates your benefit amount to give you credit for any months in which your benefits were reduced because of your earnings.
Social Security and Income Taxes
Selfstarter2 also asked about paying income taxes on Social Security.
If you have significant sources of income other than Social Security, you could very well pay taxes on up to 85% of your benefits.
Whether you owe taxes on your Social Security depends on your “combined income.” The SSA defines this as the sum of:
- Your adjusted gross income
- Your nontaxable interest
- One-half of your Social Security benefits
If you file an individual tax return and your combined income is between $25,000 and $34,000, you may owe income taxes on up to 50% of your Social Security benefits. Earn more than that, and up to 85% of your benefits could be subject to taxes.
If you file a joint return and your combined income is between $32,000 and $44,000, you may owe taxes on up to 50% of your benefits. Earn more than that, and up to 85% could be taxable.
Here’s a table that may help clarify:
|Single||Married filing jointly|
|Benefits not taxed:||< $25,000||< $32,000|
|50% of benefits taxed:||$25,000 – $34,000||$32,000 – $44,000|
|85% of benefits taxed:||> $34,000||> $44,000|
It’s not as bad as it sounds
In his question, Selfstarter2 said that if “your spouse still works and is not getting Social Security benefits but makes more than $34,500 annually, your Social Security benefits will be taxed upwards of 50% to 85%.”
No. That’s false.
You’re never paying 50% to 85% taxes on your Social Security. Depending on your income, up to 85% of your Social Security will be taxable at your normal bracket, not at 50% to 85%.
Bottom line? You should be aware of the penalties for working if you take Social Security early. And you should also be aware that if you have other income, part of your Social Security benefits could be taxable. But neither of these things is the end of the world. If you’re penalized when you work, you’ll get it back. And if part of your Social Security is taxed, unless you’re in a high bracket, it may not cost you that much.
I hope that answers your question, Selfstarter2.
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I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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