Friday, June 1, 2012

Social Security Mis-information

I was meeting with a client this morning and again finding the need to explain the 2 implications to Social Security retirement benefits.  The mis-information comes in to play when taxpayers think that when they attain Full Retirement Age (FRA) that they can make as much money as they want and pay no income tax on their benefits. This is sadly not the case as I explain their are 2 distinct and different items that affect each individual.

The first is the limitation of earned income and the correlation on the Social Security benefits when a person has taken early Social Security benefits (this is before reaching the Full Retirement Age (FRA) as defined by Social Security Administration).  If you take Social Security early (before attaining FRA), the benefit received is reduced for taking it prior to reaching the full retirement age but more importantly is that if the recipient has earned income in excess of prescribed limits, then the Social Security benefits will be reduced or the recipient may have to repay excess benefits received.  For 2012, benefits will be reduced by $1 for each $2 earned over $14,640 during the year.  This can be a critical factor in whether you want to take benefits early because you may be tempted to go back to work if the right opportunity comes along.  Just remember that you may be penalized for earning too much income and have to repay Social Security.

The second impact is the effect on your taxable income.  Regardless of your age your Social Security benefit may be taxable if you receive other forms of income.  Generally if your income is less than a certain threshold (Single/Head of Household - $25,000, Married Filing Joint - $32,000), then your Social Security is not taxable.  Over those amounts you may have to include up to 85% of your Social Security benefit in your Federal taxable income.  This can have profound effects on itemized deductions for income based deductions (for example - medical expenses or investment expenses which both must exceed a certain percentage of your Adjusted Gross Income).

Each circumstance is unique so caution is advised as to the timing of applying for Social Security benefits.  If you take retirement benefits early, caution should be taken with regard to health insurance as well as Medicare does not apply until you attain age 65.  So if you take early Social Security benefits, be sure to consider the impact on medical benefits in the intervening years.