3 Surprising Ways Your Income Influences Your Social Security Benefits

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While Social Security is a valuable retirement source of income, its value is more dependent on your other sources of income than many realize. How much money you earn during your working years and after retirement has an effect on how much money you receive from the program. The following are three ways in which your income affects your Social Security benefits.

 

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1. The size of your checks is determined by your earnings during your working years.

When calculating your benefit, the Social Security Administration considers your average monthly income over your 35 highest-earning years. For high earners, the benefit is calculated on the first $147,000 earned in 2022. That is the maximum amount of Social Security taxes you will pay this year, so the additional income will have no effect on your checks.

For those who have worked less than 35 years, the Social Security Administration considers their average monthly income over their entire employment history. Additionally, it includes some years with no income in their calculation, reducing their benefit.

Individuals who work longer than 35 years typically earn larger paychecks, as the majority of people earn more later in their careers than when they first enter the workforce. Over time, these later, higher-earning years begin to supplant their earlier, lower-earning years in calculating their benefits, resulting in permanently larger checks.

 

2. Your income determines whether any funds are deducted from your checks if you claim before reaching full retirement age.

If you continue to work after reaching your full retirement age (FRA) – which varies depending on your birth year – your Social Security benefit becomes subject to the earnings test. If your income is excessive, the government deducts a portion of your Social Security benefits.

In 2022, you will lose $1 for every $2 over $19,560 earned if you remain within your FRA for the entire year. For those reaching their FRA this year, if you earn more than $51,960 before your birthday, you will lose $1 for every $3 earned over that amount.

The good news is that you will eventually receive this money back. When you reach your FRA, the government adjusts your benefit amount to include the money it withheld previously. This increases the size of future checks.

However, if you do not require your Social Security checks to cover your living expenses, you may be better off deferring benefits until retirement. This method will increase the size of your checks more than the method described previously.

 

3. Your retirement income determines whether or not you owe Social Security benefit taxes.

The federal government taxes Social Security benefits for individuals whose income exceeds certain thresholds. Individuals with provisional incomes exceeding $25,000 and married couples with provisional incomes exceeding $32,000 may owe taxes on up to 50% of their benefits. Individuals earning more than $34,000 and married couples earning more than $44,000 may owe taxes on up to 85 percent of their benefits.

Additionally, twelve states impose a tax on Social Security benefits. Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia are included in this category. Each state has its own formula for determining which residents may be subject to taxes and the amount owed. If you live in one of these states, you can learn more by contacting your state department of taxation.

In some cases, you may be able to avoid benefit taxation by reducing your annual retirement spending or investing exclusively in Roth funds as you approach the aforementioned thresholds. However, this is not always possible. If you are unable to avoid paying Social Security benefit taxes, the next best course of action is to prepare for them. Include these expenses in your budget to avoid being surprised at tax time.

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Bear in mind these Social Security tips as you proceed. If possible, take some of the steps discussed above to increase your benefit or avoid having money withheld or taxed from your checks. Maintain an awareness of any changes to Social Security to ensure you do not miss out on additional opportunities to increase your benefit.

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