Social Security benefits can go a long way in retirement, and many older adults rely on their monthly checks for a significant portion of their income. However, there's a chance you may not receive as much as you think.
There are a couple of sneaky ways you could lose your benefits. If you're not preparing for them, you could be in for a surprise in retirement.
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1. State and federal taxes
Social Security benefits are subject to both state and federal income taxes, but how much you'll pay depends on a couple of factors.
State taxes will depend on where you live, and fortunately, 38 states do not tax benefits. Among the 12 that do tax Social Security, each state has its own laws regarding how much of your benefits are taxed -- so it's worthwhile to check your individual state's regulations.
Federal taxes will depend on a figure called your provisional income, which is half of your annual Social Security benefit amount plus your adjusted gross income and any nontaxable interest. If your provisional income is higher than $25,000 per year (or $32,000 per year for married couples filing jointly), you'll owe federal income taxes on up to 85% of your benefit amount.
| Percentage of Your Benefits Subject to Federal Taxes | Provisional Income for Individuals | Provisional Income for Joint Filers |
|---|---|---|
| 0% | Under $25,000 per year | Under $32,000 per year |
| Up to 50% | $25,000 to $34,000 per year | $32,000 to $44,000 per year |
| Up to 85% | More than $34,000 per year | More than $44,000 per year |
Source: Social Security Administration.
If these income limits seem low, it's because they are. They haven't been adjusted since 1984, when Social Security first became subject to federal taxes. As costs continue to rise, more seniors will be subject to taxes over time if these limits remain unchanged.
2. Working in retirement
You can continue working after claiming Social Security, but depending on your earnings, you could lose a portion of your benefit amount. If you're under your full retirement age (FRA) -- which is between ages 66 and 67, depending on the year in which you were born -- your income will be subject to an earnings limit.
In 2023, that limit will be $21,240 per year. For every $2 you earn over that limit, your benefits will be reduced by $1. For example, if you're earning $30,000 per year from your job, that's $8,760 over the limit, and your benefits would be reduced by $4,380 per year (or $365 per month).
If you'll reach your FRA in 2023, your earnings will be subject to a different limit. For every $3 you earn over the limit of $56,520 per year, your benefits will be reduced by $1.
| Age | Earnings Limit in 2023 |
|---|---|
| Under FRA | $21,240 per year |
| Reaching FRA in 2023 | $56,520 per year |
Fortunately, these reductions aren't permanent. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount to account for the money that was withheld. If you continue working past your FRA, your benefits will not be reduced, regardless of your earnings.
However, it's still important to keep these earnings limits in mind because they'll affect your monthly income leading up to your FRA. In some cases, your benefits could even be withheld entirely, depending on how much you're earning.
Social Security can make or break retirement for many seniors, so it's wise to be aware of how taxes and your income can affect your benefit amount. By keeping these factors in mind, you can head into retirement as prepared as possible.
