Tax planning and compliance for investors
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By Kaye A. Thomas
Updated June 3, 2009
People who have earnings while receiving social security retirement benefits before reaching full retirement age may receive a reduced benefit.
Social security lets you choose to begin taking your retirement benefit as early as age 62 instead of waiting until your full retirement age. If you do, you'll have to accept a reduced benefit. In addition, you'll have to deal with the earnings test for early retirees (sometimes called the retirement test). If your earnings are too high during the period before you reach full retirement age, your benefit for that year may be reduced.
Starting with the month you reach full retirement age, you can earn as much as you want without having a reduction in benefits, even if you chose to start your benefits before full retirement age.
If your benefit is reduced as a result of the earnings test, the Social Security Administration will recalculate your benefit upward when you reach full retirement age. In other words, you get credit for the fact that you didn't receive your full benefit, so these dollars are not necessarily lost forever.
This rule applies only to earnings as defined for purposes of social security. That means it applies to wages from your job (including bonuses, commissions and vacation pay), and also applies to net earnings from self-employment. It doesn't apply to pensions, annuities or investment income. You can have an unlimited amount of income other than earnings without a reduction in benefits under the earnings test.
Wage earnings count in the year earned, not the year paid, so if you receive a bonus or vacation pay this year that was earned in an earlier year, it will count for the earlier year. Self-employment earnings generally count in the year received, even if earned in an earlier year.
Benefits of self-employed individuals may be reduced on the basis of the self-employed individual performing "substantial services" even if earnings are not above the stated threshold.
The regular rule for the earnings test applies if you are
receiving retirement benefits for the entire year, and you are
below full retirement age for the entire year. The amount you
can earn without a reduction in benefits is adjusted each year
for inflation. For recent years, the amounts are given in the
If your earnings go over this amount for any year before the year you reach full retirement age, your social security benefit is reduced by one dollar for every two dollars you are over the limit.
Example: You decide to begin receiving social security benefits in 2004, but you will not reach full retirement age until 2006. During 2005 you have earnings of $14,400.
Your earnings are over the limit by $2,400. This rule reduces your benefit by half of that amount, so your benefit for 2005 would be reduced by $1,200 ($100 per month).
If you start receiving social security retirement benefits in a month other than January, the earnings test will apply on a monthly basis for the first year of benefits. For example, you could begin receiving benefits in July after earning $30,000 during the first six months of the year. Your earnings would not be reduced, even though your total earnings for the year are over the limit, if your earnings for each month after you begin receiving benefits is less than the monthly amount ($1,180 per month in 2009).
A more generous rule applies in the year you reach full
retirement age. The limit is much higher, and it applies only to
earnings during the months before you reach full retirement age.
Furthermore, if you go over the limit, the reduction in benefit
is $1 for every $3 over the limit, instead of every $2 over the
limit (the general rule). The dollar amount for this rule is
adjusted each year for inflation. For recent years, the amounts
are given by the following table:
Year of Full Retirement Age
These are annual amounts. Divide by 12 to determine the amount that can be earned per month before the month in which you reach full retirement age.
Beginning with the month in which you reach full retirement age, you can earn as much as you like without a reduction in benefits. Prior to 2000, the earnings test applied until a later age, but now it applies only until you reach full retirement age.
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