Tax Considerations For Social Security Benefits
How do these tax considerations affect when you should apply for Social Security benefits? At todays , they may not have much of an impact on most people. Still, tax rates and income thresholds can change, so its worth remembering that you will lose less of your Social Security to taxes if you are in a lower marginal tax bracket when you begin to collect.
You should also note that if you decide to return to work, even part-time, and arent yet at your FRA, your Social Security benefits may be temporarily reduced. The reduction is $1 for every $2 of earned income over $18,960 in 2021 . During the year when you reach your FRA, your benefits will be reduced by $1 for every $3 in income over $50,520 in 2021 until the month when you become fully eligible. That money isnt lost, however. The SSA will credit it to your record when you reach your FRA, resulting in a higher benefit.
How To Use The Grids
Here are the specific grid rules for people who are aged 60 and older. Find the grid that describes your RFC . Next, find the row that describes your education level and your previous work experience. The final column will show the decision that Social Security will make based on the previous factors.
RFC for SEDENTARY WORK
Recent education or training for skilled work
Skilled or semiskilled work with or without transferable skills
It can be difficult to determine the skill level of your old job and whether any of the skills you learned can transfer to another position. If you are unsure about this, you should speak to an experienced disability attorney.
Theres A Social Security Spousal Benefit
Marriage brings couples an advantage when it comes to Social Security. One spouse can take what’s called a spousal benefit, worth up to 50% of the other spouse’s Social Security benefit. For example, if your monthly Social Security benefit is worth $2,000 but your spouse’s own benefit is only worth $500, your spouse can collect a spousal benefit worth $1,000 — bringing in $500 more in income per month.
Just as the benefit based on your own work history is reduced if you claim it early, the same is true for a spousal benefit. That 50% figure is the maximum amount that only a spouse who is at least full retirement age is eligible for. Taking the spousal benefit early at, say, age 62, reduces the amount to as little as 32.5% of the higher earners benefit. If you take your own benefit early and then later switch to a spousal benefit, your spousal benefit will still be reduced.
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Early Benefits Can Still Pay Off
However, taking early benefits can still pay off despite the reduced monthly check. But youll want to be sure you budget for a reduced benefit.
No one can predict how long youll live, but if youre facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate, Neiser says.
Married women are also good candidates for claiming early benefits because they are likely to outlive their husbands. Those widows then become eligible to receive the greater of either their benefit or their late husbands benefit.
However, this scenario works only if the husband does not claim his benefits early. By not claiming early benefits, the husband effectively increases the monthly benefit his wife eventually receives. So youll want to calculate how filing early will affect your spousal benefit here.
If You Are An Immigrant Who Is Not Sponsored
If you are an immigrant who is not sponsored, you may be eligible to receive the Allowance based on the number of years you have resided in Canada after age 18.
If you have lived in Canada for fewer than 10 years since you turned 18, but you have lived or worked in a country that has a social security agreement with Canada, you may be eligible for a partial benefit.
Your Allowance or the Allowance for the Survivor entitlement will gradually increase with every year that you continue to reside in Canada until you have reached 10 years of residence.
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For People Born In 1960 What Relief Might Be Available
Remember, we havent had unemployment this high in 80 years, and Congress has never had reason to remedy the Social Security Administrations use of the NAWI in its benefits calculations. If these numbers continue, Congress could step in and do something such as alter the law so that a decline in the wage index wont significantly lower benefits from one year to the next.
Ruthie, in short, your question is a good one, its a legitimate worry, and in the middle of everything we are all going through right now, here are some considerations.
First, have you accumulated other assets for retirement?
I realize its a difficult thing to hear right now, but Social Security was never intended, nor should it be counted upon, as a guaranteed source of retirement income. The fact is, that as it currently exists, the program is unsustainable, even potentially insolvent, and major, sudden changes, including means testing or reduced benefits could happen at any time.
Second, you need to update your financial and retirement plans. As it stands right now, and based on your question, its likely that any other monies you have are going to need to last longer.
Frankly, knowing all your options has never been more important than right now.
What Are My Insurance Options If I Cannot Get Medicare At Age 62
If you dont qualify for Medicare, you may be able to get health insurance coverage through other options:
- Employer-provided insurance
LeRon Moore has guided Medicare beneficiaries and their families as a Medicare professional since 2007. First as a Medicare provider enrollment specialist and now a Medicare account executive, Moore works directly with Medicare beneficiaries to ensure they understand Medicare and Medicare Advantage Plans.
Moore holds a bachelors degree from Southern New Hampshire University and is A+ Certified with a Medical Records Clerk Certification and Medical Terminology Certification from Midlands Technical College.
Hes passionate about educating, informing, and resolving issues concerning Medicare and Medicare Advantage Plans, and considers it imperative that he does all he can to educate and inform the senior community as much as possible about Medicare.
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What If I Delay Taking My Benefits
If you retire sometime between your full retirement age and age 70, you typically earn a “delayed retirement” credit . For example, say you were born in 1955 and your full retirement age is 66 and 2 months. If you started your benefits at age 68, you would receive a credit of 8% per year multiplied by approximately two . This makes your benefit ~15% higher than the amount you would have received at age 66.
That higher baseline lasts for the rest of your retirement and serves as the basis for future increases linked to inflation. While it’s important to consider your personal circumstancesit’s not always possible to wait, particularly if you are in poor health or can’t afford to delaythe benefits of waiting can be significant.
If you decide to wait past age 65, you may still need to sign up for Medicare. In some circumstances your Medicare coverage may be delayed and cost more if you do not sign up at age 65.
Social Security Benefits For Workers Turning 60 In 2020 Will Very Likely Drop Due To The Coronavirus Pandemic
Congress could pass legislation that would prevent this outcome.
As a result of the COVID-19 pandemic, about 3 million retired workers who turn 60 years old in 2020 will very likely have much lower lifetime Social Security benefits than previously expected. Without legislative changes, the average earner stands to lose nearly $1,500 per year for the rest of their life. Fortunately, there is a simple legislative changeexplored in detail belowthat would fix these problems without lowering the benefits of any other cohort of retirees. Chairman of the U.S. House Ways and Means Social Security Subcommittee, Rep. John Larson , has introduced such legislation*and Congress should fix this situation as soon as possible.
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Children Can Also Collect Social Security Benefits
Minor children of Social Security beneficiaries can be eligible for benefits. Children up to age 18 and disabled children older than 18 may be able to receive up to half of a parent’s Social Security benefit. The disability must have occurred before the age of 22. The adult child can continue collecting the benefit even after the parent has died, as long as the disability prevents them from working.
What If Im Not Automatically Enrolled At 65
If your Medicare enrollment at 65 is not automatic, but you want to enroll, here are some more magic numbers.
3 and 7.
To start taking advantage of Medicare at 65, you need to sign up during the three months before the birthday month you turn 65. Those are the first three months of your seven-month Initial Enrollment Period.
Unless your birthday is on the first day of the month, your Initial Enrollment Period includes the three full months before turning 65, the month you turn 65, and the three months after you turn 65. If you were born on the first day of the month, IEP is the four months before your birth month, along with your birthday month and the two months after.
If you sign up during one of the months before your 65th birthday, your coverage will begin on the first day of the month you turn 65 .
Are you eligible for cost-saving Medicare subsidies?
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Talk To A Disability Lawyer
Need a lawyer? Start here.
How To Claim Benefits
Claiming benefits is actually fairly straightforward. Simply log on to the Social Security Administration website and provide all of the requested documentation. The SSA prefers that retirees file this way, although you also can visit a local SSA branch or give them a call at 772-1213.
Essentially, youll just need to provide identifying documents about yourself and your employment. Expect to provide your Social Security number, birth certificate and a copy of your most recent W-2 or self-employment tax return.
Youll also need to provide information about any unmarried children under 18 , your bank information and citizenship status. If necessary, the SSA will contact you for additional information.
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What Happens If You Claim After Your Fra
If you wait until your age 70 to start claiming benefits, then youll get an extra 8% per yearor, in total, 132% of your primary insurance amount for the rest of your life. Claiming after you turn 70 doesnt increase your benefits further, so theres no reason to wait longer than that.
The longer you can afford to wait after age 62 , the larger your monthly benefit will be. Nevertheless, delaying benefits doesnt necessarily mean that youll come out ahead overall. Other factors should be considered, including your expected longevity and whether you plan to file for spousal benefits. You should also consider the tax, investment opportunity, and health coverage implications.
What To Consider Before Filing For Social Security
A larger benefit check sounds great, but there are tradeoffs, and soon-to-retire folks should consider multiple issues before they decide one way or the other on when to file. If you really want to consider all the avenues, then youll have to think about your finances and longevity two issues that people have a hard time grappling with.
But heres the key trade-off: you can file early and take a reduced benefit, expecting that a shorter life span will mean you receive more now, or you could file at full retirement age or later and claim a bigger check, and eventually live long enough to claim more than the first approach.
Social Security is like longevity insurance, says Brent Neiser, a Certified Financial Planner and former chair of the Consumer Advisory Board at the Consumer Financial Protection Bureau. Its a stream of payments that will not stop throughout your life, so delaying your benefits to keep those payments as large as possible forms a helpful base to your retirement plan.
Neiser urges those who have not saved enough for retirement to use whatever means possible to postpone their Social Security benefits until after their full retirement age to help boost their future income.
You can use personal savings to help bridge the gap, but ideally you should plan to work a little longer , Neiser says.
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It’s Time To Get The Benefits You Deserve
Suze Orman shares how to get disability benefits in less timeâwith no out-of-pocket costs
How Do Ssdi And Social Security Retirement Work Together
SSDI pays out your full retirement benefits until you qualify to draw them under the traditional Social Security retirement scheme. Once you reach full retirement age based on the year you were born, the SSA will automatically start your retirement benefits and cease your SSDI payments.
The SSA allows you to file for retirement benefits as early as age 62. You can also wait and receive your full benefit amount when you reach full retirement age. Depending on what year you were born, this may vary from 65 to 67 years old.
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Full Retirement Age By Year
Full retirement age is the age you begin to receive full Social Security benefits. If you start to draw your Social Security benefits before reaching your full retirement age, the payment you receive will be less.
An easy way to think about full benefits and retirement age is this,
- Social Security will reduce your payments if you choose to receive your benefit before full retirement age. The percentage of reduced amount is highest at age 62 and decreases until you reach full retirement age.
- If you choose to receive Social Security payments when you reach full retirement, you will get the total amount.
- Suppose you choose not to receive Social Security payments when you reach full retirement and delay your benefit. In that case, you can increase the amount of your payment by earning delayed retirement credits.
If youre not sure when you reach full retirement age, our table provides the years and months you need to know for full retirement.
What Is Full Retirement Age
The size of your monthly Social Security benefit depends on a few factors, including how much you earned over the years, the year you were born, and the age when you start claimingdown to the month.
Youll receive your full monthly benefit if you start claiming when you reach what Social Security considers your full retirement age , sometimes also referred to as normal retirement age. FRA was 65 when Social Security began, but it has been raised to 67 for anyone born in 1960 or later. To find your FRA, see the chart below.
|Finding Your Full Retirement Age|
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Watch Out For Hidden Costs
Youll also want to consider other lifestyle factors, especially Medicare. Americans become eligible for federal health insurance coverage at age 65, well after when you can begin to file for Social Security.
If you stop working at age 62 and lose health insurance, you have to get supplemental insurance to bridge the gap until you turn 65 and Medicare kicks in, Neiser says.
If you work during retirement, you have another incentive to delay collecting Social Security. Earning too much at a job after you begin collecting your benefit can reduce your payout, but only if you have yet to hit full retirement age.
However, when you hit full retirement age, your benefit will increase to account for any benefit that was withheld earlier due to working. Heres how much you can earn and not get hit.
If youre younger than full retirement age for all of 2021, the Social Security Administration will deduct $1 of your monthly check for every $2 you earn above $18,960 per year.
If you reach full retirement age in 2021, the administration deducts $1 of your monthly check for every $3 you earn above $50,520 until the month you reach retirement age.
Youll also owe Social Security and Medicare tax on your earnings, even if youre already receiving benefits.
So those are some potential pitfalls to claiming Social Security early.