3635 / What should taxpayers who continue to work during retirement consider with respect to Social Security planning? Are Social Security benefits taxed?
During the year in which the individual reaches full retirement age, the lower $23,400 amount is increased to $62,160 ($59,520 in 2024) in the months prior to the month in which the individual actually reaches full retirement age. Further, during those months, his or her Social Security benefits are only reduced by $1 for every $3 that is earned above the $62,160 limit. For example, if the individual reaches full retirement age in September, his or her benefit will be reduced during the months of January through August, assuming his or her earned income exceeds $62,160.
Once the individual reaches full retirement age, his or her benefit is no longer reduced regardless of earned income.
It should be noted that these reductions are made in addition to any otherwise applicable income taxes that apply to the individual’s Social Security benefit—when an individual earns over $25,000 per year ($32,000 for a married individual), one-half of his or her Social Security benefit plus any earned income will be taxable.
Planning Point: With record-setting cost-of-living adjustments in 2022 and 2023, clients should be advised that the increase in the value of a taxpayer’s Social Security check can also have adverse tax consequences because it may increase the taxpayer’s income above the thresholds for determining whether benefits are taxable.
Despite all of this, if an individual’s Social Security benefit is reduced because he or she continues to work during retirement, the individual will actually receive a higher monthly benefit amount once he or she actually reaches full retirement age. Essentially, the system treats such an individual as though he or she did not choose to claim benefits as early as he or she actually did claim benefits (because a portion of those benefits was actually withheld).