Ask the Advisor: January/February 2024

Ask the Advisor: January/February 2024

What Type Of Income Causes Reductions To Social Security Benefits?

Q: I received a notice that I earned more than the Social Security earnings limit, and now my Social Security benefits have been reduced. What type of income causes this, and is there any way for working seniors to avoid these reductions?

A: You can work after starting Social Security retirement benefits, but if you are younger than full retirement age, and you make more than the annual earnings limit, the Social Security Administration will reduce your benefit.

If you are under your full retirement age, Social Security will deduct $1 in benefits for every $2 you earn above the annual limit, which is $22,320 ($1,860/mo.) in 2024.

In the year you turn your full retirement age, you are allowed to earn more — $1 in benefits will be deducted for every $3 above the limit, which in 2024 is $59,520. Once you reach full retirement age, there are no limits on your earnings.

These reductions apply only to earned income from jobs you work. To avoid reductions, consider working part-time or looking for a job that pays less than the annual limit. Other income, such as that from investments, interest and dividends, or annuities, are not subject to the earnings test. If you need money, you may want to consider taking distributions from these types of sources, but please get some professional financial counseling first!

Whatever you decide, be aware that up to 85% of your Social Security benefits can be taxable when your total income (of almost any type) exceeds certain income thresholds, for example, if you file a:

  • federal tax return as an “individual” and your “combined income” exceeds $25,000.
  • joint return, and you and your spouse have a “combined income” of over $32,000.

If you are married and file a separate return, you probably will have to pay taxes on your benefits.

To help you determine what portion of your benefits are taxable, the IRS has an online tool:

According to TSCL’s latest Retirement Survey, almost one out of every four older taxpayers who have received Social Security for more than three years report that they paid taxes on a portion of their Social Security benefits for the first time during the most recent tax season. We expect that trend to continue this tax season due to the Social Security income boost from the 8.7% COLA in 2023.

Many are discovering that the tax on their Social Security benefits has to do with the fact that the income thresholds that subject their benefits to taxation are fixed rather than adjusted annually for inflation, like income tax brackets and standard deductions.  As COLAs increase Social Security income, beneficiaries pay taxes on an increasing share of benefits over time.

The income thresholds would be significantly higher if adjusted to today’s dollars and senior taxpayers, especially those with very modest incomes would be subject to the tax. For example, if the “individual” income thresholds are adjusted for inflation from 1984 to today’s dollars, then the individual filing status of $25,000 would be about — $74,614.

If the joint filing status is adjusted for inflation from 1984 to today’s dollars, $32,000 would be about $95,506.

What is your tax situation? Tell us! Please take TSCL’s 2024 Senior Survey _ .