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.
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@example.com.