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Social Security benefits form an important part of most people’s retirement income. When you have other retirement income, the extra money can impact the amount of your Social Security benefit check and the tax status of your benefits in some situations. Knowing the rules before you sign up to receive Social Security retirement benefits helps you avoid some costly mistakes in your retirement planning.
If your other retirement income is small, it’s not normally going to affect your Social Security benefits. However, the rules are a little different if you choose to start benefits early. You can start at age 62 with reduced benefits, but full retirement age for Social Security purposes is currently 66. Full retirement age for people born after 1954 is scheduled to gradually increase until it reaches 67 for people born after 1959.
Starting Benefits Early
If you elect to start your Social Security benefits before you reach full retirement age, income from working may reduce your benefit amount. As of 2012, your benefits are reduced by $1 for every $2 you make over $14,640. This rule does not apply once you reach full retirement age. Also, once you reach full retirement age, your benefit amount is increased so that you eventually get the money lost due to work-related reductions during your early retirement. Medicare benefits, which usually begin at age 65, are not affected by other retirement income.
Normally, Social Security benefits are not subject to taxes. However, if your other income exceeds IRS thresholds, part of your Social Security benefit may be taxable. To see if this is the case, add one-half of your annual Social Security benefits to your adjusted gross income. For single filers, part of your benefits may be taxable if the total comes to $25,000 or more, as of the 2011 tax year. For couples filing a joint return, the threshold is $32,000.
As a rule, if you have enough other retirement income to owe taxes on Social Security, 50 percent of your taxes will be subject to federal income taxes. The percentage can go up to as much as 85 percent when your adjusted gross income exceeds $44,000 if you are married and file a joint return. For single filers, the figure is $34,000. Some items, such as qualified distributions from a Roth IRA, are not counted when figuring your retirement income. However, taxable distributions from traditional IRAs and similar retirement plans must be included when figuring your income to determine the taxability of Social Security benefits.
- Social Security Online: Early or Late Retirement?
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- Internal Revenue Service: Are Your Social Security Benefits Taxable?
- Internal Revenue service: Publication 915 (2011), Social Security and Equivalent Railroad Retirement Benefits
- Social Security: How Work Affects Your Benefits