Social Security Earnings Penalty - Confused & Bewildered

[ocdude]

Hey - I'm a first-timer here - neat forums. I'm an early retiree who will start drawing social security in March, 2009, at age 62. I work part-time, and I'm thoroughly confused by the details of the earnings penalty. I understand that $1 will be withheld for every $2 earned above the threshold. Past that, I'm having trouble finding any details. I'd appreciate feedback from anyone who understands the system.
1) What counts as "earnings"? Does it include pension? Investment earnings? Is there a particular line on my 1040 that's used to represent earnings?
2) When I start drawing in March, 2009, will an earnings penalty be applied immediately, based on 2008 earnings?
3) What else do I need to know about the earnings penalty?
Thanks very much for your help.

 

[Alan]

Have you looked at the SS website that describes this

You can work and get Social Security at the same time

If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit.
For 2008, that limit is $13,560.

From that , I expect if you start taking SS in 2009 I don't expect what you earned in 2008 will be taxed at all.

If you work part time in 2009 the limit will be higher but will be at least $13,560.

I also believe it is only earned income that is counted - not pensions or interest and dividends. This because with earned income you are paying FICA which increases your future SS benefits.

However, I am not an expert by any means and would suggest you ask your SS office to be certain of the facts.

 

[jazz4cash]

and this part from a link on the page linked above.......

When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you're self-employed. We include bonuses, commissions and vacation pay. We don't count pensions, annuities, investment income, interest, veterans or other government or military retirement benefits.

 

[ocdude]

Thanks for the link and info. That article does a good job of clearing up what earnings are counted, but I'm still confused on how the penalty is applied. My part-time work is self-employed (web design). My net earnings can vary considerly month-to-month. If the earnings deduction is not based on previous-year earnings, how and when is the deduction applied? Sorry for being so dense, but it's a hard concept to get a handle on. Thanks for all the feedback.

 

[Gail]

My husband is also self employed, so we have been through some of these issues.

When you sign up for Social Security, they will ask you what you expect to earn for the year in which you are filing. They will ask a few more detailed questions due to your being self employed. If you have rendered services for which payment will come in after you start drawing, you can disclose this and they will take it into account.

There is a special rule for the first year you retire if you are under full retirement age. They put an earnings limit on each month; in other words, whatever is the maximum amount you can earn for the year is divided by 12, and that is the maximum you can earn for each month remaining in the calendar year, after you start drawing. You are not penalized for what you earn prior to drawing. 2008 earnings will not affect 2009, if you start drawing in 2009. However, if you go over your maximum earnings in 2009, then it may affect what you get in 2010, because that's when they will deduct the penalty for the excess earnings.

They will probably contact you at some point later in the calendar year and ask you to fill out some imformation about how money you have earned or expect to earn.

 

[igsoy]

One more thing that nobody mentioned:

I read on the .gov website that any amount that is withheld from your benefit is recaptured later, so you will get it back in higher benefits at full retirement age when they recalculate for you.

People may already be aware of this, but I was curious about this regarding MIL's situation, and I had to look a while before I could find the info on their website.

How Work Affects Your Benefits

 

[ocdude]

My husband is also self employed, so we have been through some of these issues...

Gail, thanks for the great feedback. That's the kind of info I cannot find anywhere on ssa.gov, and exactly what I needed regarding business planning for this year.

Great forums! Thanks to everybody for the helpful info.

 

[OAG]

Hey - I'm a first-timer here - neat forums. I'm an early retiree who will start drawing social security in March, 2009, at age 62. I work part-time, and I'm thoroughly confused by the details of the earnings penalty. I understand that $1 will be withheld for every $2 earned above the threshold. Past that, I'm having trouble finding any details. I'd appreciate feedback from anyone who understands the system.
1) What counts as "earnings"? Does it include pension? Investment earnings? Is there a particular line on my 1040 that's used to represent earnings?
2) When I start drawing in March, 2009, will an earnings penalty be applied immediately, based on 2008 earnings?
3) What else do I need to know about the earnings penalty?
Thanks very much for your help.

This may be a dumb question on my part but why don't you delay taking SS until your FULL Retirement age and eliminate any limits on earned income?

 

[ocdude]

This may be a dumb question...

Nope, not a dumb question at all. According to the financial whizzes, you've got the right answer. In my case, I've got 2 reasons -

1) I need the money, NOW!!

2) I don't anticipate a long life span, based on both genetics and life style.

For me, it's a matter of take the money and run.....

 

[OAG]

Nope, not a dumb question at all. According to the financial whizzes, you've got the right answer. In my case, I've got 2 reasons -

1) I need the money, NOW!!

2) I don't anticipate a long life span, based on both genetics and life style.

For me, it's a matter of take the money and run.....

And you have the exact reason for doing what you plan on doing. I wish you good luck on engineering the earnings to preclude the penalty AND the possible income tax impact of the payments.

 

[jrbernier]

Earned Income and SSAN - Married?

Some Questions:

• If I retire at age 62, will the earned income from my spouse be counted against my 'earned income' limit?(she will still be working).
• And at what rate? I have been told that you can double the earned income for a married couple before one hits the penalty.
• Can we avoid the penalty by filing married/separate income tax returns?

Jim

 

[Martha]

Some Questions:

• If I retire at age 62, will the earned income from my spouse be counted against my 'earned income' limit?(she will still be working).
• And at what rate? I have been told that you can double the earned income for a married couple before one hits the penalty.
• Can we avoid the penalty by filing married/separate income tax returns?

Jim

I believe that the only earned income which is relevant is your own earned income, not your spouse's. How Work Affects Your Benefits

 

[Finance Dave]

Thanks for the link and info. That article does a good job of clearing up what earnings are counted, but I'm still confused on how the penalty is applied. My part-time work is self-employed (web design). My net earnings can vary considerly month-to-month. If the earnings deduction is not based on previous-year earnings, how and when is the deduction applied? Sorry for being so dense, but it's a hard concept to get a handle on. Thanks for all the feedback.

I won't even try to answer your original question, as the rules are so complex that I have to spend an hour studying my own circumstances to determine how it works for me.

However, I do know one thing....the earnings penalty does have an upside. Since it means you're working while collecting SS, your SS benefit will be recalculated to include those earnings at the point you reach Full Retirement Age, and your benefit will then be increased if the earnings were higher than one of the already used 35 data points in your calculation.

In summary, you'll get back the penalized amount in some form...in the future.

here's the link --- > Retirement Planner: When you work and reach full retirement age