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Social Security & Medicare Questions Q: I turn 65 this year and continue to work after taking early retirement at age 62. I'm divorced. I will earn about $10,000 this year and will receive $10,560 in Social Security. I draw about $6,000 from my IRA. My total income will be about $26,560 before taxes. Now the company I work for has offered me more hours. I would earn about $18,000 next year. I understand that a new law will allow us to earn as much as we want to without losing benefits. Is that correct?-K.H. A: The earnings restrictions on Social Security benefits for those over 65 was lifted in April, but until the month you turn age 65, benefits are still reduced by $1 for every $2 earned beyond the limit, which is $10,080 this year. Before you accept more hours and higher earnings, you will want to calculate whether the additional earnings will subject your Social Security benefits to tax. Taxation of benefits is not the same thing as reduction of benefits. The taxation rules have not changed. Unearned income from investment plans like IRAs is not counted under the Social Security earnings restriction test and did not reduce your benefits. You did not withdraw enough from your IRA to subject your Social Security benefits to tax in the past. Your additional earnings, however, would subject your benefits to tax. If your "provisional income" (earnings, unearned income and half of your Social Security benefit) is over $25,000 but no more than $34,000 (single filers) then up to 50% of your Social Security benefit would be subject to tax. Here's the bottom line: You receive net Social Security benefits of $10,560. You have earned income of $10,000 and IRA income of $6,000. Your "provisional income" is $21,280 ($10,000 + 6,000 + 1/2 of SS $5,280). Your Social Security benefits are not taxable because they do not exceed the $25,000 base amount. Thus you only pay income taxes on $16,000. In a 15% tax bracket your federal tax liability would be about $2,400. Your total net income would be $24,160 ($10,000 + $6,000 + $10,560 - $2,400). What happens if your earnings increase to $18,000? Assuming a 2.5% Cost-of-Living Adjustment, your Social Security benefits for next year would be $10,824. Half of that is $5,412. Your provisional income would be $29,412 ($18,000 + 6,000 + 1/2 of SS $5,412). This exceeds the base of $25,000 by $4,412. The taxable amount of your Social Security benefits is the lesser of either half of the excess of $4,412 ($2,206) or half of your Social Security benefits. $2,206 of your benefits is taxable. You would pay taxes on $26,206 ($18,000 + 6,000 + 2,206) which bumps you into the 28% tax bracket. You would owe $7,338! Your total net income would be $27,486 ($18,000 + $6,000 + $10,824 -$7,338). But look what happens if you reduce what you draw from your IRA to $1,500: your provisional income would be $24, 912 ($18,000 + 1,500 + 1/2 of SS $5,412). This does not exceed the $25,000 base and thus none of your Social Security benefits would be taxable. You pay tax on $19,500, which keeps you in the 15% tax bracket and you owe $2,925. Your total net income would be $27,399 ($18,000 +1,500 + $10,824 -$2,850) only $87 less BUT you've managed to keep $4500 growing in your IRA and out of Uncle Sam's pocket. For more information and worksheets: J.K. Lasser's Your Income Tax 2000, IDG Books Worldwide$14.95
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