Dear Rusty: I retired from work this year (age 62) and I will receive my first social security benefits in September. Is there a special rule for the first year you retire that allows you to not pay taxes on your social security since you have earned no other income since you retired? Before I retired, I earned about $50,000, which I know is more than the usual allowed income. Signed: Retired Senior
Dear Retired Senior: I’m afraid there is no such “first year” rule which exempts you from paying income tax on your Social Security benefits. When you file your Federal income taxes with the IRS you will need to claim your Social Security (SS) benefits as part of your income, and whether it is taxable will depend upon whether your “modified adjusted gross income” (MAGI) for the year exceeds $25,000 (if you file single) or $32,000 (if you file married-filing jointly). “MAGI” includes your taxable income from all sources (your “adjusted gross income” from your Federal income tax return), plus any tax-exempt interest you may have received, plus half of your annual Social Security benefits. If your MAGI exceeds the above levels, then up to 50% of your Social Security benefits will become a part of your taxable income; or if you exceed $34,000 (filing single) or $44,000 (filing married-jointly) then up to 85% of your annual SS benefits will become taxable. If you don’t exceed those levels your SS benefits aren’t taxable as income.
However, I suspect you may be confusing income tax on your Social Security benefits with another rule – Social Security’s “earnings test” which, if you have not yet reached your full retirement age, sets a limit on what you can earn without your benefit payments being affected. If you are collecting benefits before you have reached your full retirement age and you exceed the annual earnings limit ($17,640 for 2019) Social Security will withhold some of your benefits – $1 for every $2 you are over the limit. If that is what you’re referring to then, yes, there is a special rule for the first year you are collecting Social Security. That special first year rule says that if you claim benefits mid-year and you have not yet reached your full retirement age, you’ll be subject to a monthly earnings test for the remainder of that year, rather than the annual test. So, if your benefits start in September, provided you don’t earn more than $1470 in September or any month thereafter in 2019 you won’t lose any benefits. But if you do exceed that monthly limit, even by $1, you won’t be entitled to any SS benefits for that month. The monthly test is only in the calendar year you claim benefits – it goes away for you in 2020 and you’ll be subject to the annual earnings test only for next year.
Please note that the earnings limits are considerably more if you are claiming in the year you will reach your full retirement age. If this were the year you will reach your full retirement age, the annual limit would be $46,920 and the monthly limit would be $3910 (these limits change annually). However, if you stay fully retired and don’t return to work you will not need to worry about the Social Security earnings test but, depending on your “MAGI,” you may need to pay income taxes on your Social Security benefits.
This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at [email protected].