Ask Rusty – About Income Testing and the Taxation of Social Security Benefits – AMAC





Dear Rusty: I am 63 years old, married and we file a joint income tax return. If I now apply for Social Security and continue to work and earn $7,000 a year more than the annual limit of $19,560, I know my benefits would be withheld at the rate of $1 for every $2 in above the limit ($3,500). But if I were to contribute $7,000 to a conventional (not Roth) IRA and take advantage of the deduction, would that reduce my earned income and eliminate the SS benefit withholding? And will such an IRA deduction help avoid taxation of my SS benefits if I am above the $32,000 tax threshold for married – joint filing? I’m trying to figure out how much I can afford to earn while collecting Social Security benefits. Signed: In search of ways

Dear Researcher: Contributions to an IRA will not reduce the tax payable on your Social Security benefits. Taxation of Social Security benefits is determined using what is known as Modified Adjusted Gross Income (MAGI), which is your normal AGI on your tax return, plus 50% of the SS benefits you received during the tax year, plus any other non-taxable income. you had (which would include contributions to your IRA). As you know, MAGI over $32,000 will result in taxation of 50% of your SS benefits received during the tax year, but MAGI over $44,000 will increase this percentage up to 85% of benefits SS received during the tax year (taxed at your normal IRS tax rate).

For the Social Security income limit, which applies to anyone collecting early benefits, your gross work income is what matters, so contributing to an IRA will not reduce the amount by which you exceed the limit – they will use your gross W2 amount, not the Adjusted Gross Income (AGI) from your tax return.

For your information, the annual income limit for 2022 is $19,560 and if it is exceeded, you will pay the penalty ($1 for every $2 over). But by claiming mid-year, you will also be subject to a monthly limit of $1630 in 2022, and if exceeded, you are not entitled to SS benefits for that month (monthly limit will not apply only for the remaining months of 2022). What will happen is that SS will calculate the penalty both ways and see which is higher – the one for exceeding the annual limit or the one for exceeding the monthly limit – and they will assess the smaller penalty. As you may know, the earnings cap increases approximately 2.5 times in the year you reach full retirement age (FRA) and disappears entirely from the month you reach the FRA.

But there is also something to be aware of: if you have benefits withheld because you have exceeded the income limit, when you reach full retirement age, you will receive time credit for the months benefit holdbacks, which means they will increase the amount of your FRA benefits. depending on the number of months during which you have not received benefits before. So, at least in theory, you could possibly recover the benefits withheld for exceeding the income ceiling by obtaining a higher benefit from the age of your full pension. But income tax on SS benefits is different — there is no age limit for assessing federal income tax on your Social Security benefits.

This article is intended for informational purposes only and does not represent legal or financial advice. It presents the opinions and interpretations of AMAC Foundation staff, trained and accredited by the National Social Security Association (NSSA). The NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other government entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or write to us at [email protected].











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