This article was updated on May 12, 2016.
Millions of people get Social Security benefits, but few really know all of the program's details. In particular, some of the best features of Social Security are almost unknown to ordinary Americans, and many people therefore miss out on money they'd otherwise be entitled to receive.
To reveal Social Security's secrets, we turned to three of our Motley Fool retirement contributors to dig into some little-known aspects of the program. Take a closer look and see what you can learn about Social Security.
When to claim Social Security is a critical decision for any retiree to make, but one little-known fact is that you can actually change your mind after you claim benefits if you decide you made the wrong choice. As the Social Security Administration describes here, if you change your mind about when to start getting benefits, you can often withdraw your Social Security claim and then reapply at a later date.
Withdrawing your Social Security claim involves some additional hurdles, though. First, you can only withdraw your claim if less than 12 months has gone by since you started getting benefits. Second, you have to be prepared to repay all of the benefits you've received, as well as any spousal or children's benefits that your family members may have gotten as a result of your having filed for Social Security. In addition, you must also repay any amounts withheld from your Social Security checks for Medicare premiums, income-tax withholding, or garnishment collections.
It used to be that the SSA allowed claim withdrawals at any time. However, after use of that provision became common, some saw it as being abused, so the SSA rules changed shortly thereafter. You can only withdraw a claim once in your lifetime, so if you change your mind, make sure you make the opportunity count.
One aspect of Social Security benefits I believe far too few beneficiaries are aware of is that Social Security benefits can be taxed! It's a bit unnerving to realize that money you've paid into the system through decades of work can be taxed a second time, but it'll ultimately depend on how much income you bring in per year and which state you live in.
According to the IRS, about a third of Social Security beneficiaries will owe some tax on their benefits. For individual filers, the quick formula to determine whether or not you'll owe taxes on your Social Security benefits is to take half of your annual Social Security income and add it to your nontaxable interest and adjusted gross income. If you're a single tax filer and that "base" total is between $25,000 and $34,000, then 50% of your benefit may be taxable. If you earn more than $34,000, than 85% of your benefit may be subject to income tax. For joint filers, those same income thresholds are $32,000 and $44,000.
There are an additional 13 states that also tax Social Security benefits. Many of these states offer exemptions up to a certain level of adjusted income each year, but four states -- North Dakota, Vermont, West Virginia, and Minnesota -- tax your benefits indiscriminately.
Your secret path to keeping more of your earned benefits is simple: Understand which states tax Social Security benefits and try to avoid them if possible -- and avoid earning additional income in retirement that could put you over taxable base levels.
Most of us probably know we can start collecting Social Security benefits as early as age 62 and as late as age 70, with benefits shrinking or growing for every year before or after our "full" retirement age. (For those born in 1960 or later, your full retirement age is 67. It's 65 for those born in 1937 or earlier, and for those born between 1937 and 1960, it's somewhere in between.) Indeed, benefits grow by about 8% per year, giving those with a full retirement age of 67 the chance to boost their ultimate checks by about 24%.
That can seem well worth it, but it's not quite as worth it as you might think. The Social Security Administration (SSA) explains: "If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between." That makes sense once you realize that even though checks that begin at age 62 will be substantially smaller than checks that begin at age 70, you will receive them for 96 more months!
Thus, for many people, it can make a lot of sense to just start collecting early. But keep in mind that the SSA's calculations are based on average life expectancy. If you expect or reasonably hope to live a very long time, you'll make out better with the bigger checks, if you can manage delaying receiving them. Everyone's situation is different, but consider starting to collect early, as it's not necessarily such a bad deal.