By Marcia MacDonald Mantell for Next Avenue
So much of your final decision about Social Security will depend on your personal situation at the time of claiming. Before deciding when to claim, however, there are other financial realities to carefully consider. Among them are the following:
- The Earnings Limit Test This is used when you are working but decide to claim Social Security before your Full Retirement Age.
- Taxation of Social Security Benefits Depending on your overall income, some of your Social Security benefit will be part of your taxable income.
- Medicare Premiums and Social Security Benefits The Medicare health program for people 65 and older is integrated into, and coordinated with, Social Security. There are implications to your benefit payment amount when you are enrolled in Medicare and collecting Social Security.
Below are a few key pieces of information on each. You’ll want to do further reading on Social Security’s website, SSA.gov, and consult with a retirement income financial adviser before making final decisions.
Many women are quite keen on the idea of claiming their Social Security benefit before they reach Full Retirement Age (which is now between 66 and 67). But some want to continue working as well. That way, they’ll continue to bring in their employment earnings and get a boost in overall income by starting Social Security.
Before claiming this way, however, you’ll want to know about Social Security’s Earnings Limit Test.
You can claim your Social Security benefit as early as age 62. And you can hold down a job and get paid wages when you are claiming. But if your job pays you too much — above the earnings limit — you won’t receive your entire Social Security amount. Any retirement benefits over the limit will be withheld until your Full Retirement Age, and eventually paid to you over time.
Let’s say Sally is turning 62 in December 2019. She’s thinking about moving from full-time to part-time and making up some of her lost wages by claiming Social Security. Today, her gross income is $55,000 working full-time. Her income would drop to $35,000 if she goes part-time.
She thinks she’ll make up most of the difference by claiming Social Security at the earliest age, 62, when her benefits would be about $1,170 per month (compared to the higher $1,616 a month by waiting until her Full Retirement Age at 66 and six months).
But in 2019, the Social Security earnings limit is $17,640. When you earn more than that amount from working and claim benefits before Full Retirement Age, your benefits are reduced. Sally’s going to make about double the earnings limit; therefore, she’ll have a benefit reduction. Any Social Security benefits she claims will be reduced by $1 for every $2 she goes over the limit.
Her annual Social Security payment of $14,060 will be reduced by half of her excess earnings, or $8,680.
Sally won’t lose the benefits reduced by the earnings test. Social Security will recalculate them when she reaches Full Retirement Age of when she stops working, whichever comes first.
Once Sally reaches her Full Retirement Age in 2024, she can continue to work, earning any amount, and will be paid an adjusted benefit amount for her previously withheld benefits with no further reductions.
2. Taxation of Social Security Benefits
Unless you have income that keeps you in the very lowest tax bracket, you will pay taxes on any dollars considered income throughout retirement and, of course, your Social Security benefits are considered income. But whether you will pay tax on them depends on your overall household financial picture.
The general rule for determining the taxation of your Social Security benefits is that if your household “combined income” exceeds a certain amount, a portion of your Social Security benefits will be taxed. Unfortunately, the limits for determining “high-income” are not indexed for inflation. So, every year, more retirees fall into the tax ranges where their benefits are taxed.
For single women who have a “combined income” of $34,000 or more, as much as 85% of Social Security payments for the year will be considered income and taxed as ordinary income. For women who are married, filing jointly, if you and your spouse have a combined income of $44,000 of more, up to 85% of both of your Social Security payments for the year will be included on your Internal Revenue Service (IRS) Form 1040 as income.
For the purposes of Social Security and the IRS, your combined income is a simple calculation. You just add together the following. found on a special worksheet found in IRS Publication 915:
- Your adjusted gross income from page 2 of the 1040
- Any otherwise-non-taxable income (like tax-free municipal bonds)
- Half of your Social Security income for the year
- Half of your spouse’s Social Security income, if you are married, filing jointly
The sum of these amounts is your combined income. From there, you follow the steps in the worksheet, comparing your combined income to the upper and lower thresholds that determine whether some of your Social Security gets taxed.
You or your tax preparer will need to run this analysis every year. Some years you might owe tax, some years you might not. It depends on your combined income each and every year.
3. Medicare Premiums and Social Security Benefits
Another important factor to consider before claiming your Social Security benefit is how much your Medicare Part B premiums will be. Here’s why:
The Social Security and Medicare programs are knitted together. Once you are enrolled in both programs, they work together.
The Social Security Administration is responsible for collecting Part B Medicare premiums and does so by automatically deducting your premiums from your Social Security benefits before you receive your Social Security payment.
The result is a big surprise to many women. They don’t get as much in their Social Security check as they thought they would.
Medicare Part B is the part of Medicare that helps you pay for your doctors and outpatient procedures once you reach age 65. There are still co-pays and deductibles you may be responsible for, but generally Part B covers about 80% of the bill for covered services. That’s why you pay a monthly premium — for the 80% share of the covered costs.
The amount you will pay for your Part B premiums depends on your overall household income. The standard monthly premium in 2019 is $135.50 per month, or $1,626 for the entire year. That is a per-person cost, meaning that you’ll pay $135.50 and, if you are married, your spouse will pay an additional $135.50.
Keep in mind that the monthly premium costs typically increase each year, so check Medicare.gov for updated premium costs every year.
If you happen to have high household income, you’ll likely pay a lot more for Part B.
Depending on your household’s modified adjusted gross income, your 2019 premiums will range from about $190 per month per person to over $460 per month per person.
When it comes time to enroll in Medicare, you’ll sign up for it on Social Security’s website (not on Medicare’s website). Make sure you have your MySocialSecurity account and your MyMedicare account set up in advance; you do that online.
Understanding the rules about Social Security benefits and when to start claiming Social Security can be difficult. But they’re critically important, especially for women — since women typically live longer lives than men. The new book, What’s the Deal With Social Security for Women?, by retirement consultant Marcia MacDonald Mantell, is extremely helpful. The above post is an excerpt about three important factors women should take into consideration when deciding the right time to begin claiming Social Security benefits.
Marcia MacDonald Mantell is a retirement consultant with Mantell Retirement Consulting and author of What's The Deal With...Social Security for Women? She is a Retirement Management Advisor and a National Social Security advisor. Her blog is Boomer Retirement Briefs.
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