Dear Rusty: I’m 63, married, and we file a joint tax return. If I claim Social Security (SS) now and keep working and earn $7,000 more per year than the annual limit of $19,560, I know I’d have benefits withheld at the rate of $1 for every $2 over the limit ($3,500). But if I […]
Dear Rusty: I’m 63, married, and we file a joint tax return. If I claim Social Security (SS) now and keep working and earn $7,000 more per year than the annual limit of $19,560, I know I’d have benefits withheld at the rate of $1 for every $2 over the limit ($3,500). But if I were to contribute $7,000 to a conventional (not Roth) IRA and take the deduction, would this 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 taxation threshold for married — filing jointly? I’m trying to figure how much I can afford to earn while collecting Social Security benefits.
Signed: Searching for Ways
Dear Searching: Contributions to an IRA will not reduce the income-tax liability on your Social Security benefits. Taxation of SS benefits is determined using something known as modified adjusted gross income (MAGI), which is your normal adjusted gross income (AGI) on your tax return, plus 50 percent 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 cause 50 percent of your SS benefits received during the tax year to become taxable, but MAGI over $44,000 will up that percentage to as much as 85 percent of SS benefits received during the tax year (taxed at your normal IRS tax rate).
For the Social Security earnings limit, which applies to anyone collecting early benefits, your gross income from working is what counts so contributing to an IRA won’t reduce the amount you exceed the limit by — the Social Security Administration (SSA) will use your gross W2 amount, not the AGI from your tax return.
FYI, the 2022 annual earnings limit is $19,560 and if that is exceeded, you’ll pay the penalty ($1 for every $2 over). But claiming mid-year you’ll also be subject to a 2022 monthly limit of $1,630 and, if that is exceeded, you aren’t entitled to SS benefits for that month (the monthly limit will only apply for the remaining months of 2022). What will happen is the SSA will compute the penalty both ways and see which is greater — the penalty for exceeding the annual limit or the one for exceeding the monthly limit — and it will assess whichever penalty is smaller. As you may know, the earnings limit goes up by about 2.5 times during the year you reach your full retirement age (FRA) and goes away entirely starting in the month you attain FRA.
But there is also something to be aware of: If you have benefits withheld because you exceeded the earnings limit, when you reach your full retirement age you will be given time credit for the months benefits were withheld, meaning that the SSA will increase your FRA benefit amount according to the number of months you didn’t get benefits before that. So, at least theoretically, you can eventually recover the benefits withheld for exceeding the earnings limit by getting a higher benefit payment starting at your full retirement age. But income tax on SS benefits is different — there is no age cap for assessing federal income tax on your Social Security benefits.
Russell Gloor is a national Social Security advisor at the AMAC Foundation, the nonprofit arm of the Association of Mature American Citizens (AMAC). The 2.4 million member AMAC says it is a senior advocacy organization. Send your questions to: ssadvisor@amacfoundation.org.
Author’s note: This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s 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 governmental entity.