How Working After Full Retirement Age Affects Social Security Benefits
Key Takeaways
- Up to 85% of Social Security benefits can be taxable based on income.
- Couples filing jointly may pay taxes on 50-85% of benefits, based on income.
- Social Security benefits are not taxed at the state level in most states.
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Impact of Post-Retirement Work on Social Security
Everyone must pay applicable Social Security taxes on income, even those working past full retirement age. On the plus side, working past full retirement age may also increase Social Security benefits in the future because you continue contributing to Social Security through the payroll tax.
Temporary Reduction in Benefits Due to Income
Continuing to work can actually lower current benefits, if any, taken during the year the full retirement age is reached, according to a Social Security Administration limit (which changes every year).
For instance, if the full retirement age is reached in July, the total benefit income earned from January to July must be below the limit, or Social Security benefits are lowered by $1 for every $3 of income over the limit.
Additionally, if you are under full retirement age for the entire year, $1 is deducted from your benefit payments for every $2 you earn above the annual limit.
That money deducted is held by the Social Security Administration and repaid incrementally once the taxpayer is no longer working. There are no limits on income earned past the month that full retirement age is reached when the full benefit amount is paid no matter how much income is earned.
How Social Security Benefits Are Taxed
Taking Social Security benefits while continuing to work may have the unexpected negative consequence of bumping a taxpayer into a higher tax bracket.
In addition, most people forget that a certain percentage of Social Security benefits may be taxed—up to 85%—depending on filing status and combined income (which includes half of your Social Security benefits).
Some states also tax Social Security benefits. It is possible to have taxes withheld from Social Security benefit payments by filling out IRS Form W-4V or requesting a Voluntary Withholding Request Form online.
Social Security benefits for some beneficiaries could be taxed at the state level in some states. If you live in one of those states, check with the relevant state tax agency to learn more.
As with the federal tax, how these agencies tax Social Security varies by income and other criteria.
Fast Fact
The Social Security Administration defines combined income as someone’s adjusted gross income plus nontaxable interest they receive plus ½ of their Social Security benefits amount.
Strategies to Reduce Taxes on Social Security Benefits
There are several remedies available for those who are taxed on their Social Security benefits. Perhaps the most obvious solution is to reduce or eliminate the interest and dividends that are used in the IRS’s provisional income formula (which is the same as the Social Security Administration’s combined income definition shown above).
Reduce or Eliminate Interest and Dividends
Therefore, the solution could be to convert the reportable investment income into tax-deferred income, such as from an annuity, which will not show up on the 1040 Form until it is withdrawn. If you have $200,000 in certificates of deposit (CDs) earning 3%, which translates into $6,000 a year, that will be counted as provisional income.
But the same $200,000 growing inside an annuity, with the interest reinvested back into the annuity, will effectively yield a reportable interest of $0 when computing provisional income.
Generally, annuities become taxable income when they are taken as distributions depending on the account type. Therefore, virtually any investor who is not spending all of the interest paid from a CD or other taxable instrument can benefit from moving at least a portion of their assets into a tax-deferred investment or account.
Work Less, Earn Less
Another possible remedy is to simply work a little less, especially if you are at or near the threshold of having your benefits taxed.
Advisor Insight
Steve Stanganelli, CFP®, CRPC®, AEP®, CCFS
Clear View Wealth Advisors LLC, Amesbury, MA
As long as you are working and earning an income, whether in a self-employed capacity or for an employer, then you will be required to contribute to Social Security.
Whether or not you need to pay taxes on your Social Security benefits, however, depends on your modified adjusted gross income (MAGI). If your MAGI is above a certain threshold for your filing status (e.g., single or married filing jointly), then your benefits would be taxable. Up to 85% of a taxpayer’s Social Security benefits are taxable.
How Much of Your Social Security Is Taxable After Reaching Retirement Age?
Notably, 85% of your Social Security benefits is potentially taxable after retirement. Your annual income will determine taxes on your benefits. If you file as an individual and your income reaches a certain limit, 50% of your benefits will be taxed. Any amount over that limit will qualify 85% of your benefits to be taxed.
At What Point Do I Stop Paying Social Security Tax?
You are not required to pay any Social Security tax on income that goes past the wage base limit. So if you earn more than that limit, you don’t pay taxes on the amount that is over the limit.
What Is the Social Security Tax Rate for Working Retirees?
The combined rate for working retirees is 7.65%, which includes 6.20% up to the annual wage base limit and Medicare at 1.45%, with no wage limit.
Do You Have to Pay Taxes on Social Security?
You may have to pay taxes on Social Security benefits. It will depend on your income.
The Bottom Line
If you continue to work after your retirement age, you will continue contributing to Social Security via the payroll tax. When you start receiving Social Security benefits, they may be taxed depending on your combined income. It’s possible to be taxed on up to either 50% or 85% of your benefits. Income levels affect whether Social Security benefits are taxed,
There are plenty of strategies to avoid being taxed, however. They include reducing your work income and reducing income from interest and dividends.