Retirees are often ready, willing,
and able to start new careers late in life that may earn them valuable
incomes. However, some individuals may feel that it is not worthwhile
to work for wages, only to have to "give up" some of
those earnings in the form of higher income taxes. Frustrating
as that may sound, it is important to understand the fundamentals
of Social Security income and taxation so you can make your retirement
years more "golden" and less "taxing!"
Income Limits—Paying to Work?
The
first factor you must consider is your age and the so-called Social
Security "give-back." If you are age 62 or older,
but under the full retirement age (65-67 depending on your birth
year), and are receiving reduced Social Security benefits, you
must "give back" $1 for every $2 earned above $12,000
(in 2005). The year in which you attain full retirement age your
benefits would be reduced by $1 for each $3 earned over $31,800.
Upon attainment of full retirement age, you may earn as much
as you like and Social Security benefits are not reduced.
How Much is Taxable?
A second factor affecting your Social
Security benefits is the potential income taxation of those benefits. Let’s
assume you are working and each month you also receive a check from
the Social Security Administration. You must first determine
how much, if any, of your benefits is included in your gross
taxable income. The first step in estimating this is to add up
the following items: your wages, taxable pensions, interest,
dividends, and other taxable income; all tax-exempt interest;
any exclusions from income; your net earnings (net income less
net losses) from self-employment; and half of your Social Security
benefits.
This total is then compared to a first-tier threshold of $25,000
for a single taxpayer or for a married taxpayer filing separately,
who lived apart from his or her spouse for the entire year, or
$32,000 for a married taxpayer filing jointly. For a married taxpayer
filing separately, who lived with his or her spouse for any period
during the year, the first-tier threshold is $0.
For the sake of illustration, suppose your total applicable earnings
are $27,000 and you are married, filing jointly. Since the total
does not exceed the applicable threshold amount of $32,000, then
no portion of your Social Security benefits is taxable. However,
if the total exceeds the applicable threshold amount, a further,
more complicated, calculation must be performed to determine the
amount of your benefits that are taxable. You can refer to IRS
Publication 915, Social Security and Equivalent Railroad Retirement
Benefits, for more information, or consult your financial or tax
professional.
As you can see, performing these calculations is no simple task.
Thus, it is important for anyone who is thinking about taking
Social Security benefits while still working to understand the
potential tax consequences and to plan accordingly. As with all
tax planning matters, it is wise to consult a tax professional
to ensure your planning decisions are consistent with your overall
goals.
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