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It's Not the IRS, It's You: 3 Ways You're Cutting Your Own Social Security Benefits

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The IRS generally won't take a bite out of your Social Security benefits, but there's a very real chance that you could.

For many current and future retirees, taxes on retirement benefits are a major source of concern. However, the reality is that only around half of all beneficiaries owe the IRS a cut of their Social Security checks.

That's because you won't be subject to taxes on benefits until your provisional income hits a certain threshold ($25,000 for single filers and $32,000 for married joint filers). And even when they do apply, you'll only be taxed on between 50% and 85% of benefits, depending on how high your income is.

Provisional income isn't all income, either -- it's half of Social Security benefits, plus other taxable and some non-taxable income. That means distributions from Roth IRAs won't count. These tax rates have been the same for a long time and aren't likely to change any time soon, so most retirees won't have to worry about tax increases on benefits, either.

But that doesn't mean your benefits won't potentially be subject to cuts. In fact, the biggest reductions in your Social Security checks could come from decisions you make. Here are three possible actions that might end up reducing the size of your checks. 

Older couple reviewing financial paperwork.

Image source: Getty Images.

Claiming benefits early

Christy Bieber: One of the most likely things you'll do to cut your benefits is claim them early. See, you've been assigned a full retirement age based on your birth year. Depending on when you were born, it's between the age of 66 and 2 months and the age of 70. 

When you start your benefits ahead of schedule -- as many people do  -- you get hit with penalties. These reduce your benefit by a small amount each month, but the ultimate impact is pretty substantial. For each of the first three years you claim your benefits ahead of your FRA, you'll see an annual reduction of 6.7% of the amount of your standard benefit. And if you're more than three years early, an additional 5% annual reduction applies. 

That means if you claimed at 66 when your benefits were 67, you'd cut your annual Social Security income by 6.7%. And that reduction lasts for life and impacts all future benefits increases, which are calculated on a percentage basis. 

That doesn't mean claiming early never makes sense -- there are times when getting your benefits ASAP is smart. But it is something to think about when deciding when to retire. 

Not taking steps to boost your income

Maurie Backman: Your Social Security benefits are calculated based on your personal earnings history, so the more money you make (up to a point) during your 35 highest-paid years on the job, the higher your monthly retirement benefit stands to be.

Each year, there's a wage cap instituted for Social Security tax purposes, and wages up to that threshold count as income when calculating benefits. In 2021, the wage cap is $142,800, which means  earnings beyond that point won't raise your future benefits. But if you're currently earning $50,000 and have the potential to boost your income to $60,000, that $10,000 difference in wages will be factored into your benefits equation.

So how do you boost your income (other than beg your boss for a raise, which may not go over so well)? For one thing, make sure you're being compensated fairly given your role, geographic location, and years of experience. There are plenty of websites that allow you to compare salary data, so spend a little time doing research, because if you can prove that you're statistically underpaid for what you do, you may be able to snag a raise.

You can also work on growing your job skills, which could lead to a promotion and a higher wage. Or, search for a comparable position outside your current company. Often, that's the best way to score a salary bump.

Finally, consider getting yourself a side job. Any type of wage you pay taxes on can count for Social Security purposes, so if you're unable to grow your salary at your main job, find a second gig that can pad your income and pave the way to a higher retirement benefit once you're ready to claim it.

Not working long enough

Katie Brockman: To be eligible for Social Security retirement benefits, you generally need to have worked and paid payroll taxes for at least 10 years. However, to receive as much as possible each month, you'll need to work for at least 35 years before claiming benefits.

To calculate your benefit amount, the Social Security Administration (SSA) first adjusts your wages throughout your career for inflation. This is called indexing, and it accounts for any changes in wage levels from the time you began working until the time you retire. From there, the SSA will choose the years with the highest indexed earnings and take an average of those wages.

It's important to note that only the 35 highest-earning years are included in your average. Once the SSA has averaged your earnings over the highest-earning 35 years of your career, it will divide that amount by the number of months in 35 years. The result is your average indexed monthly earnings, or AIME. Your AIME is then run through a formula to determine your primary insurance amount (PIA), which is the amount you'll receive by claiming benefits at your full retirement age.

If you haven't worked a full 35 years by the time you file for benefits, you'll have zeros added to your average -- which will reduce your AIME. Because your AIME is used to determine your monthly benefit amount, a lower AIME will result in smaller monthly checks.

While the calculations behind your Social Security benefit amount may be complex, the important thing to keep in mind is that if you don't work at least 35 years, your benefit amount will be lower. So when you're considering filing for benefits, make sure you've worked long enough to receive as much as you deserve.

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