Many Social Security recipients wonder how much additional income they can earn without reducing their Social Security benefits. The Social Security Administration (SSA) has limits on how much recipients can earn from work and still receive full Social Security benefits. Earning above these limits will result in withholding of benefits. Understanding these limits is important for Social Security recipients who want to supplement their income through work.
Quick Facts on Social Security Earnings Limits
– There are two categories of earnings limits – one for recipients below full retirement age and one for recipients who have reached full retirement age.
– For 2023, recipients below full retirement age can earn up to $21,240 without benefit reductions. For every $2 earned above this limit, $1 is withheld from benefits.
– For recipients who have reached full retirement age, there is no limit on earnings – benefits are not reduced no matter how much is earned.
– The earnings limits only apply to income from work. Other sources of retirement income like pensions, investments, interest do not reduce benefits.
– Benefits that are withheld are not lost permanently. Once the recipient reaches full retirement age, benefits will be recalculated and increased to account for the previous reductions.
Earnings Limits for Recipients Below Full Retirement Age
For Social Security recipients who are below full retirement age (currently age 66 and 4 months for people born in 1956), earned income can reduce Social Security benefits. The SSA applies an “earnings test” which sets a limit for how much can be earned from work while still receiving full benefits.
For 2023, the annual exempt earnings amount is $21,240. This means recipients who are below full retirement age can earn up to $21,240 from work without having benefits reduced. For every $2 earned above this limit, $1 is withheld from Social Security benefits.
For example, if a recipient earned $29,240 from work in 2023, that exceeds the limit by $8,000 ($29,240 – $21,240). The SSA would calculate excess earnings of $4,000 ($8,000/2) and withhold that amount from the recipient’s benefits.
It’s important to note that the withheld benefits are not lost permanently. Once the recipient reaches full retirement age, the SSA will recalculate and increase benefits to account for the previous reductions due to excess earnings. Essentially, the withheld benefits are deferred until full retirement age rather than lost entirely.
The earnings limit is adjusted annually based on average wage growth. For reference, here are the annual exempt earnings amounts over the last five years:
| Year | Annual Exempt Earnings Amount |
|---|---|
| 2023 | $21,240 |
| 2022 | $19,560 |
| 2021 | $18,960 |
| 2020 | $18,240 |
| 2019 | $17,640 |
Special Rule for Year of Retirement
A special earnings limit applies in the specific year that a recipient reaches full retirement age. For recipients who reach full retirement age in 2023, $56,520 can be earned in the months leading up to the birth month reaching full retirement age without a reduction in benefits. Starting with the birth month, there is no limit on earnings.
For example, if a recipient reaches 66 and 4 months (full retirement age for 1956 birth year) in July 2023, they could earn up to $56,520 from January to June without benefit reductions. Starting in July, the earnings limit no longer applies.
No Earnings Limit After Reaching Full Retirement Age
Once Social Security recipients reach full retirement age, there is no longer a limit on earned income. Recipients who have reached full retirement age can earn any amount from work without having it reduce their Social Security benefits.
The full retirement ages based on birth year are:
– 1937 or earlier – 65 years
– 1938 – 65 years and 2 months
– 1939 – 65 years and 4 months
– 1940 – 65 years and 6 months
– 1941 – 65 years and 8 months
– 1942 – 65 years and 10 months
– 1943-1954 – 66 years
– 1955 – 66 years and 2 months
– 1956 – 66 years and 4 months
– 1957 – 66 years and 6 months
– 1958 – 66 years and 8 months
– 1959 – 66 years and 10 months
– 1960 or later – 67 years
At full retirement age, earned income from wages, bonuses, commissions no longer causes benefit reductions. Other income sources like pensions, annuities, investment dividends do not cause reductions at any age.
So a recipient who has reached the full retirement age based on their birth year can earn as much as they want from work while continuing to receive full Social Security retirement benefits.
How Benefits are Reduced for Early Claiming
While delayed retirement credits can increase benefits for those who claim after full retirement age, early filing penalties can decrease benefits for those claim before full retirement age.
If a recipient claims benefits before reaching full retirement age, their benefit amount is reduced by:
– 5/9ths of 1% per month for the first 36 months
– 5/12ths of 1% for each additional month
This reduction is permanent – the benefit remains decreased even after reaching full retirement age. However, the reduction may be partially recovered if benefits are suspended after reaching full retirement age.
For example, say a recipient with a full retirement age of 66 filed for Social Security at age 62. Their benefit would be reduced by:
– 5/9ths of 1% x 36 months = 20%
– Plus an additional 5/12ths of 1% x 12 months = 5%
That’s a total reduction of 25%. When they reach full retirement age at 66, the benefit remains permanently decreased by 25% from what it would have been had they waited to claim.
The early filing reductions are intended to offset the fact that claiming benefits early results in more lifetime payments. Claiming before full retirement age means receiving benefits for more years, which must be accounted for in the monthly benefit amount.
Strategies to Minimize Early Filing Penalties
There are a couple strategies recipients who claim benefits early can use to minimize the impact of early filing penalties:
– File and suspend – Claim benefits at an early age, then suspend payments. Allow benefits to earn delayed retirement credits until age 70. Resume payments at 70 with a higher benefit.
– Claim now, claim more later – Claim benefits early, allow your full retirement age benefit to grow through delayed retirement credits. At full retirement age, voluntarily suspend then re-apply for benefits to start a new higher payment.
These strategies allow recipients to claim early retirement benefits but still take advantage of delayed retirement credits to increase their monthly benefit over time. Proper planning can help maximize lifetime Social Security income.
How Earnings Affect Disability Benefits
The Social Security earnings limit also applies to recipients collecting Social Security disability benefits. However, the limit is lower since disability benefits can be claimed prior to full retirement age.
For 2023, the annual earnings limit for Social Security disability beneficiaries is $1,470. That means earnings above $1,470 will result in $1 in benefits being withheld for every $2 earned above the limit.
A trial work period allows SSDI recipients to test their ability to work for 9 months without affecting benefits. During the trial work period, recipients can earn any amount without reduction in benefits. The nine months do not need to be consecutive – they accumulate throughout a 5-year rolling period. Any month that earnings exceed $1,470 counts toward the 9-month trial work period.
After completing the trial work period, the Substantial Gainful Activity (SGA) rule goes into effect. This limits non-blind disability beneficiaries to $1,470 per month in 2023 before benefits are reduced. Blind disability beneficiaries have a higher SGA limit of $2,630 per month. These limits typically increase slightly each year based on national average wage growth.
It’s important for disability beneficiaries to report their work activity so SSA can properly apply the earnings limits. In some cases, SSDI recipients may lose benefits entirely if earning above SGA limits after the trial work period.
Work Incentives for Disability Beneficiaries
There are a few Social Security work incentives that allow disability beneficiaries to keep more of their benefits when working:
– Extended Period of Eligibility – SSDI recipients have a 36 month extended period of eligibility after completing the trial work period. Benefits continue during this time provided earnings stay below SGA limits.
– Impairment-Related Work Expenses – IRWEs are deducted from countable earnings used to calculate benefit reductions. Things like adaptive equipment, medications, specialized transportation related to a disability qualify.
– Ticket to Work – This program provides vocational training, career counseling, and placement services to help SSDI recipients return to work. Protects benefits while pursuing employment goals.
These work incentives reward efforts to increase earnings and gradually transition off disability benefits. Disability beneficiaries should utilize these programs to maximize income from both benefits and work.
Income Taxes on Social Security Benefits
In addition to the SSA earnings limits, federal income taxes can further reduce Social Security benefits depending on how much is earned. Up to 85% of Social Security benefits may be taxed above certain income thresholds.
Whether benefits are taxed depends on a recipient’s “combined income” – which is adjusted gross income, non-taxable interest, and half of annual Social Security benefits.
For single tax filers, if combined income is between $25,000 and $34,000 then up to 50% of benefits may be taxed. If over $34,000, up to 85% may be taxed.
For joint filers, between $32,000 and $44,000 in combined income means up to 50% of benefits are taxed. Over $44,000 means up to 85% of benefits are taxed.
So higher earners may have to pay federal income taxes on a portion of their Social Security benefits. This provides an additional consideration when deciding when to claim benefits and how much to work while collecting benefits.
Strategies to Minimize Taxes on Benefits
There are some potential strategies to reduce the taxes owed on Social Security benefits:
– Claim benefits later – Delaying claiming until full retirement age or longer reduces the number of years benefits are received, potentially lowering total taxes.
– Reduce withdrawals from retirement accounts – Taking less from tax-deferred savings accounts lowers adjusted gross income used in the taxation formula.
– Harvest capital losses – Selling investments at a loss can offset capital gains and lower adjusted gross income.
– Make charitable donations – Gifts to charity reduce AGI so long as you itemize deductions.
– Contribute to health savings accounts – HSA contributions reduce gross income and can be invested long-term.
– Use Roth accounts – Roth 401(k)s and IRAs provide tax-free growth and withdrawals so they don’t impact the taxation of benefits.
Proper planning around when to take Social Security and how to withdraw retirement savings can help minimize the taxes paid on benefits. Consult a financial advisor or tax professional for guidance.
Conclusion
The key takeaways around Social Security earnings limits are:
– Recipients below full retirement age can earn up to $21,240 in 2023 without benefit reductions. Amounts above this limit cause $1 in benefits to be withheld for every $2 earned above the limit.
– Once reaching full retirement age (currently age 66 and 4 months), there is no limit on earned income. Benefits are not reduced regardless of earnings.
– Limits also apply to Social Security disability benefits. After a trial work period, earnings above $1,470 per month cause benefits reductions for non-blind beneficiaries.
– Benefits withheld due to earnings limits are not lost permanently. Once full retirement age is reached, benefits are recalculated to account for previous withholdings.
– Up to 85% of benefits may be subject to federal income tax based on a recipient’s combined income from all sources. Proper retirement distribution strategies can help reduce this tax burden.
Understanding Social Security’s earnings limits empowers recipients to make optimal decisions about when to claim benefits and how much to work. Seeking guidance from financial advisors and tax professionals can also help maximize income while avoiding unnecessary benefit reductions.