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3 Little-Known Social Security Facts That Could Make or Break Your Retirement

By Katie Brockman – Updated Sep 23, 2020 at 10:14AM

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The more you know about how Social Security works, the better prepared you'll be for retirement.

Social Security benefits are vital for millions of older Americans, with 64% of current retirees saying their benefits are a major source of income, according to a report from the Society of Actuaries.

That means it's crucial to ensure you're maximizing your monthly checks. And there are three little-known Social Security facts that could have a significant impact on your retirement.

Senior couple sitting on the beach

Image source: Getty Images.

1. If you claim benefits early, your checks will be reduced for life

The age you begin claiming benefits will affect how much you receive each month. If you claim before your full retirement age (FRA) -- which is either age 66, 66 and a certain number of months, or 67, depending on the year you were born -- your benefits will be reduced by up to 30%.

It's important to understand, too, that if you claim early, your benefits will be reduced for life. A whopping 69% of baby boomers mistakenly believe that if they claim benefits early, their benefit amount will automatically increase once they reach their FRA, a survey from Nationwide found.

In reality, though, you'll be stuck with those smaller checks for the rest of your life. That means it's especially important to choose wisely when deciding when to claim benefits, because it will permanently affect the size of your monthly checks.

2. You may owe state and federal taxes on your benefits

Even though you've been paying Social Security taxes for decades, you may still owe both state and federal taxes on your benefits in retirement. State taxes will depend on where you live, since each state has its own rules regarding taxation. Fortunately, though, there are 37 states that don't currently tax Social Security benefits, and West Virginia will soon be added to that list as it's currently phasing out its Social Security tax.

Whether you owe federal taxes on your benefits will depend on what's called your "combined income," which is half your annual benefit amount plus your adjusted gross income (excluding Roth IRA withdrawals). The percentage of your benefits that will be subject to federal taxes will depend on your annual combined income:

Percentage of Your Benefits Subject to Federal Taxes Annual Combined Income for Individuals Annual Combined Income for Married Couples Filing Jointly
0% Less than $25,000 Less than $32,000
Up to 50% $25,000 to $34,000 $32,000 to $44,000
Up to 85% More than $34,000 More than $44,000

Data source: Social Security Administration.

The good news is that no matter how much you're earning, you won't pay federal taxes on more than 85% of your benefit amount. However, because the income limits are so low, it will be tough to avoid paying federal taxes altogether.

3. You could be entitled to other types of benefits

Retirement benefits aren't the only type of Social Security benefits you may be entitled to collect. In fact, you could also be eligible for spousal benefits, divorce benefits, or survivors benefits in addition to your retirement benefit.

  • Spousal benefits: To be eligible for spousal benefits, you must be married to someone who is entitled to Social Security benefits. The maximum amount you can receive is 50% of the amount your spouse is eligible to receive at his or her FRA, and if you're already collecting more than that based on your own work record, you may not be eligible for spousal benefits.
  • Divorce benefits: Divorce benefits are similar to spousal benefits, except you cannot currently be married and your previous marriage must have lasted for at least 10 years. Again, the maximum amount you can receive through divorce benefits is 50% of the amount your ex-spouse is eligible to collect at his or her FRA.
  • Survivors benefits: You may be able to collect Social Security after a loved one passes away. Survivors benefits are primarily available to widow(er)s, but in some cases, children, parents, and other family members who were dependent on the deceased for income may be eligible as well.

Because the Social Security Administration doesn't always notify those who are eligible for these various types of benefits, it's a good idea to research what you may be entitled to so you're not missing out.

Maximizing your Social Security benefits

Social Security can be a complex topic, but it's important to know how your benefits are calculated and what types of benefits you're entitled to. By gaining a solid understanding of how the program works, you'll be better able to maximize your monthly checks.

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