Retirement Specialist With Over 40 Years Of Retirement Planning Experience

How Social Security Benefits Are Taxed

working during retirement

The IRS uses your “combined income” to determine taxability of benefits.

If your income exceeds certain income thresholds, you may owe federal income tax on up to 50% or 85% of your Social Security benefits.

The IRS uses your “combined income” to determine taxability of benefits. Combined income is defined as your adjusted gross income plus any tax-exempt interest (such as interest from municipal or savings bonds) plus 50% of your Social Security benefit. If you are married and file a separate tax return, you will probably pay taxes on all your Social Security benefits. In addition, some states may tax Social Security benefits, whereas other states may exempt them from taxation.

  • About 40% of current beneficiaries pay taxes on their Social Security benefits.

    Source: Social Security Administration, 2021

How Working Affects Benefits

If you plan to continue working, it may be wise to delay claiming Social Security benefits until you reach full retirement age. If you claim benefits prior to full retirement age and continue to work, one dollar in benefits will be deducted for each two dollars earned above the annual limit ($19,560 in 2022). In the calendar year in which you reach full retirement age, one dollar in benefits will be deducted for each three dollars you earn above a higher annual limit ($51,960 in 2022) until your birthday month. Once you reach full retirement age (66 to 67, depending on birth year), any wages earned through employment will not affect your Social Security benefit. Of course, you must pay Social Security and Medicare payroll taxes on any wages earned through employment. If your benefits are reduced because of these limitations, your benefit will be recalculated after you reach full retirement age, and you will receive credit for any benefits you did not receive because of your earnings.

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