Is the money you earn adding to or subtracting from your Social Security benefit? While Social Security is an important source of retirement income, its value is more dependent on other sources of income than many people believe.
The amount you receive from the programme is calculated based on your earnings during your working years and after retirement. Three ways in which your earnings affect your Social Security benefits are as follows.
1. Your checks are calculated based on your earnings during your working years.
The Social Security Administration calculates your benefit based on your average monthly income over your 35 highest-earning years. Only the first $147,000 earned in 2022 is counted toward your high earners benefit.
That is the maximum amount of Social Security taxes you will have to pay this year, and the additional money will have no effect on your ability to receive larger payments.
The majority of people earn more later in their careers than they do when they begin, and thus those who work for more than 35 years typically earn more.
These subsequent, higher-earning years gradually begin to take the place of their earlier, lower-earning years in benefit calculations, resulting in permanently larger checks.
2. If you file a claim prior to reaching full retirement age, your income has an effect on how much money is deducted from your checks.
If you work before reaching full retirement age (FRA), which varies by birth year, your Social Security benefit is subject to the earnings test. If your income is too high, the government deducts money from your Social Security payments.
If you remain within your FRA for the entire year of 2022, you will lose $1 for every $2 earned above $19,560. If you earn more than $51,960 this year before your birthday, you will forfeit $1 for every $3 earned above that amount.
The good news is that you will eventually receive your money. When you reach your FRA, the government adjusts your benefit amount to reflect the money it previously withheld. This results in an increase in the size of your future checks.
If, on the other hand, you do not require your Social Security payments to cover your living expenses, deferring benefits until retirement may be a better option. This strategy will result in a greater increase in the size of your checks than the previous one.
3. Whether you owe Social Security benefit taxes is determined by your retirement income.
The federal government taxes Social Security benefits if the recipient’s income exceeds certain thresholds. Individuals who earn more than $25,000 in preliminary income (adjusted gross income plus nontaxable interest and half of their annual Social Security benefit) and married couples who earn more than $32,000 in preliminary income may be subject to tax on up to 50% of their benefits.
Individuals earning more than $34,000 in preliminary income and married couples earning more than $44,000 in preliminary income may be required to pay taxes on up to 85 percent of their benefits.
Social Security Recipients Can Look Forward to a Fourth Stimulus Payment
Additionally, 12 states tax Social Security benefits. This category includes the states of Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
Each state uses a different formula to determine who is taxed and how much they owe. If you live in one of these states, you can obtain additional information by contacting your state’s tax department.
As you near the aforementioned thresholds, you may be able to avoid benefit taxation by reducing your annual retirement spending or investing exclusively in Roth funds.
This is not always possible. If you are unable to avoid paying Social Security taxes, the next best thing is to plan ahead. Include these fees in your budget to avoid being surprised during tax season.
Keep these Social Security suggestions in mind as you proceed. Consider using some of the suggestions above to boost your benefit or avoid having money deducted from your paychecks or being taxed.
Maintain an awareness of any changes to Social Security to ensure you do not miss any additional opportunities to increase your payout.