- There are several ways to help reduce taxes and maximize benefits.
- "Do-overs" are allowed within 12 months of commencing benefit payments.
- Earnings test kicks in if you claim early.
Do you plan to work for income after your retire? If so, and if you've begun taking Social Security benefits, you need to be aware of how your Social Security income may be taxed—and the earned income thresholds that determine the level of your taxes and any reductions in benefits.
In a recent AARP survey, 37% of people indicated that they plan to work either full time or part time during retirement.1 Why? In addition to the financial benefits, many older workers anticipate that working after retirement can add valuable structure to their day and provide the mental stimulation that comes from interacting with co-workers, clients, and other work associates.
Among those who plan to work in retirement out of financial necessity, a survey by the Transamerica Center for Retirement Studies found 43% expected to use the money to cover essential expenses, 37% to pay for health care, and 20% to save more for retirement.2
Whatever your reason for considering working in retirement, it’s a good idea to know how doing so will affect your Social Security benefits and your tax bill. Here are the facts, plus some strategies to consider.
Temporary benefit reductions for earned income
The earliest age at which you are eligible to claim Social Security benefits is 62. If you claim your benefits and continue to work, there is an earnings test until you reach your full retirement age (FRA), 66–67, depending on the year you were born. If you have earned income in excess of $17,640 in 2019, your benefits will be reduced by $1 for every $2 of earned income over the $17,640 limit.
Note that "earned" income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they are all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of "unearned" income.
If you reach your FRA during 2019, the limit for earned income rises to $46,920 and the benefits reduction is $1 for every $3 earned over the limit until the month you reach your FRA. After that, your earned income is not subject to an earnings test or benefit reductions.
For example, if your monthly benefit was $2,000, here is how much your benefit would be reduced for various levels of earned income at certain ages:
Monthly benefit reduction by age and earned income levels
These benefits are not truly "lost," however. If your benefits have been reduced due to earning too much prior to reaching your FRA, you will get these benefits back at your FRA when your monthly Social Security check will be increased to account for benefits withheld earlier due to excess earnings.3
Income tax implications
Social Security benefits are subject to federal income taxes above certain levels of "combined income." Combined income generally consists of your adjusted gross income (AGI), nontaxable interest, and one-half of your Social Security benefits. For individual filers with combined income below $25,000, none of your Social Security is taxed. For joint filers with combined income below $32,000, none of your Social Security is taxed. (See Income Taxes And Your Social Security Benefits for more information.)
For individual filers with combined income of $25,000 to $34,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.
For joint filers with combined incomes of $32,000 to $44,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $44,000, then up to 85% of your Social Security benefits could be taxed.
Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation.
Additionally, 13 states also tax your Social Security benefits. The rules and exemptions vary widely across this group so it is wise to research the rules for your state or consult with a tax professional if this affects you.4
Social Security and Medicare taxes
In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. There is no age limit on these withholdings, nor any exemption for any sort of Social Security benefits status.
The good news is that these earnings can also count toward the calculation of your benefits: Social Security monitors your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.
What if you are making much less in retirement than before? Could it hurt your benefits? The answer is no, because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.
Read Viewpoints on Fidelity.com: Have a smart plan for Medicare taxes
The big decision: When to claim Social Security
When to claim Social Security benefits will be one of the most important decisions that you make regarding your retirement, along with how to take income from your various retirement accounts and how you will fund your health care needs in retirement. The following chart shows the difference for someone turning 62 in 2019. Let's assume their Social Security benefit at full retirement age of 66 plus 4 months is $2,000. The first set of numbers on the chart shows the benefit amounts they would receive by claiming at various ages.
A change in the rules in late 2015 closed the door on the popular claiming strategy for couples that allowed one spouse to file and suspend their benefit while the other spouse files a restricted application for a spousal benefit based on the first spouse’s earnings record. This option ended as of April 30, 2016.
Tip: You should also be aware of a special rule for the first year of retirement. This rule allows you to get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings. This helps people who retire in midyear or later who have already earned more than the annual earnings limit.
Going back to work—meet James
In our hypothetical example, James, age 64, retired at 62 from a plumbing supply company in the Chicago area, and claimed Social Security benefits as soon as he was eligible, at 62. James misses not having some structure in his day. He loves home improvement and helping people, so he found a job at a big box retailer. His wife, Arlene, age 61, is still working part time. Both have FRAs of age 66.
3 Social Security options for James to consider
Benefits of working longer
Working into retirement can help in your retirement planning, especially if your savings are running a bit behind your goals. Continuing to work allows you to keep building retirement savings. If you meet the eligibility requirements, you can contribute to a 401(k) or other tax-deferred workplace savings plan, a health savings account (HSA), and an IRA, even if you are collecting Social Security. You can also make catch-up contributions, which enable you to set aside larger amounts of money for retirement. The combination of the added savings, tax-deferred growth potential, the ability to delay claiming Social Security benefits, and the ability to defer tapping into your savings can be powerful, even at the end of your working career.
Next steps to consider
See how we can help you grow and protect what matters most.
See ways to combine guaranteed retirement income with flexible income sources.
Explore options on when and how to take Social Security.