Whether you're already collecting Social Security, are thinking of filing for benefits in the near term, or are years away from being eligible to sign up, it's important that you understand how the program works -- especially since it changes from year to year. Here are a few essential rules you should about that are specific to 2021.
1. What full retirement age looks like
Full retirement age, or FRA, is the age at which you're eligible to receive your full monthly Social Security benefit based on your earnings history. But FRA isn't the same for everyone. Rather, it varies based on year of birth. And in 2021, FRA is no longer 66 as it was in previous years. Rather, for anyone born in 1955, FRA is 66 and two months, which means you'll need to wait a bit longer to claim your monthly benefit in full. While you're allowed to sign up for Social Security as early as age 62, for each month you claim benefits ahead of FRA, they're reduced on a permanent basis.
2. The earnings test limits
The Social Security Administration will let you work and collect benefits at the same time. But if you do so before reaching FRA, you'll risk having a portion of your benefits withheld. That's why it's essential that you know what this year's earnings test limits look like, because those thresholds change annually.
In 2021, you can earn up to $18,960 without having your job-related income impact your benefits. Beyond that point, you'll have $1 in Social Security benefits withheld for every $2 you earn. However, there's a higher limit for those who will be reaching FRA this year, and it's $50,520. From there, you'll have $1 in benefits withheld for every $3 you earn.
As you can see, you get a lot more leeway to earn money if you'll be turning 66 and two months this year. And of course if you're already at FRA, you can earn as much as you'd like without it impacting your benefits whatsoever.
3. How much tax you'll pay on your earnings
You might assume you're liable for Social Security taxes on all of your income during your working years, but that's not necessarily true. If you're a higher earner, a portion of your income may be exempt from those taxes. Each year, there's a wage cap set for Social Security tax purposes. In 2021, that limit is $142,800, which means earnings beyond that point aren't liable for Social Security taxes.
Now one thing you should know is that president-elect Joe Biden is looking to reinstate Social Security taxes on income that exceeds $400,000. But to be clear, that's just a proposal and as of now, it's far from official, so while you may hear rumors about paying taxes on more of your earnings, for now, you're off the hook once your income exceeds $142,800 this year.
Know your Social Security rules
Though Social Security has been around since 1935, the program's rules have evolved over time, and there are still changes that occur on a yearly basis. Be sure to stay apprised of those rules so you're in a good position to manage your money and make the most of your benefits once you're ready to claim them.