Penalties with Social Security
Penalties with Social Security
Social Security can reduce your benefit if you claim your benefits before your full retirement age, reduce your benefit for earnings above a set limit during early retirement, and increase the portion of your benefit that can be taxed as income based on your earnings.
You can claim your retirement benefit as early as age 62, but this will impact the amount of your benefit you can receive. Social Security will reduce your retirement benefit by 5/9 of one percent for each month before full retirement age, up to 36 months. After 36 months, the benefit is reduced by 5/12 of one percent for each month. This means your benefit is reduced by 30% if you claim your benefits five years early (at age 62 rather than 67).
How Work Impacts Your Benefits
If you start receiving your benefits before full retirement age and are still working, your benefits will be reduced. There is a limit to how much you can earn without your benefit being reduced. If you will not reach your full retirement age by the end of 2021, your benefit will be reduced by $1 for every $2 dollars you earn above $18,960. If you will reach your full retirement age during 2021, your benefit will be reduced by $1 for each $3 you earn above $50,520.
Your gross wages count toward these limits if you are employed by someone else and your net earnings count toward these limits if you are self-employed. Investment accounts, pensions, annuities, interest, and other veterans or government benefits do not impact the value counted toward your earnings.
There is a special rule for the year you retire since most people will have worked and may have surpassed the earnings limit for the year by that point. During one year, you can get a full Social Security check for any whole month you are retired, regardless of earnings.
If you are under full retirement age and your earnings for the month are $1,580 or less, you are considered to be retired. For those who are self-employed, your retirement status is based on the number of hours you work each month. If you are self-employed and work between 15 and 45 hours a month in a job that requires a lot of skill or you are managing a sizable business, you are not considered to be retired. Working more than 45 hours is considered not to be retired and working fewer than 15 hours a month is considered to be retired.
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Tax Implications of Income
Once you reach full retirement age, there is no limit on how much you can earn and still receive benefits. Your earnings will only impact the percentage of your benefit that will count toward your gross income for income taxes. For a married couple earning between $32,000 and $44,000 or for individuals earning between $25,000 and $34,000, up to 50% of your benefits will be included in your gross income. If a married couple earns more than $44,000 or an individual earns more than $34,000, up to 85% of your benefits will be included in your gross income.