After years in the workforce many people may be approaching the season when they ask the question “When should I take my Social Security?” Of course there isn’t a right or a wrong answer to that question but the answer does have many variables and there are some facts you need to know about how Social Security income will impact your tax obligations.
First fact to get straight is this: if you are under the impression that your Social Security benefits are not taxable that’s not correct. Anywhere between 50-85% of Social Security benefits are taxable when half of the Social Security benefits plus all other income including tax-exempt interest is in excess of:
- $25000-$34000 for single head of household qualifying widow and married filing separately if the couple lived apart the entire year
- $32000-$44000 for married filing jointly
- $0 for married filing separately if the couple lived together at any time during the year
Also any Social Security that is received before the taxpayer reaches full retirement age (FRA) benefits are reduced by $1 for each $2 earned over $15720 in the year 2015. In the year the taxpayer reaches FRA the reduction is $1 for each $3 earned over $41880 up until the month FRA is reached.
The first year of retirement there is a break when earnings before collecting Social Security could already exceed the limits. Full Social Security benefits could be given to the taxpayer for any whole month they are retired regardless of the earnings for the year. So what that means is the annual Social Security earnings limit is prorated monthly and earnings after retirement cannot exceed the monthly limit.
Here are some additional things to keep in mind if you hope to minimize taxes on Social Security:
- If your spouse is working and earning more than $44000 when you decide to take your Social Security 85% of your Social Security is taxable.
- If you work part-time your earning levels will be limited until you reach FRA assuming you don’t want your Social Security reduced.
- If you wait until FRA to get a part-time job there are no income limitations and you will receive 100% of your benefits instead of 75% upon reaching FRA.
- By collecting Social Security early you reduce your FRA benefits by 25%.
- Your Social Security grows at a rate of 5-6% annually until you reach FRA.
- Between FRA and age 70 Social Security benefits grow at a rate of 8% per year.
- The break even point for collecting Social Security at the different starting ages of 62 FRA or 70 is about 76 years of age.
- When you wait to collect you ultimately make more money tax-free.
If you are still uncertain what the best decision is for you when deciding on Social Security income speak with one of Lindemeyer’s staff accountants who can advise you in the right direction. Send us a message with your specific needs and we will get back with you shortly.