Social Security is a valuable source of retirement income, but its value is more dependent upon your other income sources than many realize. How much you earn throughout your working years and in retirement affects how much you get from the program. Here are three ways that your income alters your Social Security checks.
1. Your income during your working years dictates the size of your checks
The Social Security Administration looks at your average monthly income over your 35 highest-earning years when calculating your benefit. For high earners, only the first $147,000 you make in 2022 counts toward your benefit. That's the maximum you pay Social Security taxes on this year, so the extra income doesn't boost your checks any further.
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For those who work fewer than 35 years, the Social Security Administration looks at their average monthly income over all the years they've worked. It also adds some zero-income years to their calculation, which reduces their benefit.
Those who work more than 35 years usually score larger checks because most people earn more later in their careers than they do when they first enter the workforce. Over time, these later, higher-earning years begin to replace their early, lower-earning years in their benefit calculation, and this leads to permanently larger checks.
2. Your income determines if any money is withheld from your checks while claiming under your full retirement age
If you're working under your full retirement age (FRA) -- anywhere from 66 to 67, depending on your birth year -- your Social Security benefit becomes subject to the earnings test. If your income is too high, the government withholds some money from your Social Security checks.
In 2022, you lose $1 for every $2 you earn over $19,560 if you'll be under your FRA for the full year. For those reaching their FRA this year, you'll lose $1 for every $3 you earn over $51,960 if you reach this amount before your birthday.
The good news is you'll get this money back eventually. When you reach your FRA, the government reevaluates your benefit amount to include the money it previously withheld. This makes your future checks a little larger.
But if you don't need your Social Security checks to cover your bills, you might be better off delaying benefits until you retire. This will grow your checks more than the method described above.
3. Your income in retirement determines if you owe Social Security benefit taxes
The federal government taxes the benefits of Social Security recipients whose income exceeds certain thresholds. Individuals with provisional incomes -- adjusted gross income plus nontaxable interest and half their annual Social Security benefit -- exceeding $25,000 and married couples with provisional incomes exceeding $32,000 could owe taxes on up to 50% of their benefits. Individuals with provisional incomes greater than $34,000 and married couples with provisional incomes greater than $44,000 could owe taxes on up to 85% of their benefits.
In addition, 12 states tax Social Security benefits. These are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Each state has its own formula that determines which residents could face taxes and how much they owe. If you live in one of these states, check with your state department of taxation to learn more.
You may be able to avoid benefit taxation in some cases by reducing your annual retirement spending or sticking to Roth funds as you approach the thresholds mentioned above. But this isn't always doable. If you're not able to avoid Social Security benefit taxation, the next best thing to do is prepare for it. Build these costs into your budget so you're not surprised at tax time.
Keep these Social Security tips in mind as you move forward. If possible, see if you can take some of the steps discussed above to boost your benefit or avoid having money withheld from your checks or taxed. Stay up to date on any changes to Social Security as well so you don't miss further opportunities to grow your benefit.
