How Much Can Be Earned Before Social Security Benefits Are Reduced

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How Much Can Be Earned Before Social Security Benefits Are Reduced

Q: After recently retiring at age 62, the stock market plunge forced me to rethink my plans. I went back to work in January of 2001 to avoid having to cash in stocks while the market was down. I discovered that I was only allowed to earn $10,080 before my Social Security benefits were reduced. I’m 64 and will turn age 65 in November of this year. I’ve heard that once we turn age 65 we can earn as much as we want to without losing Social Security benefits. How much may I earn this year before my Social Security benefits are reduced?

A: In 2002 Social Security beneficiaries who are ages 62 through 64 may earn $11,280. Earn more and $1 in benefits will be withheld for every $2 in earnings over the limit. There’s a special rule for the year in which you turn 65, however. In 2002 while you are age 64 and until you attain age 65 you may earn $30,000. Earn more than the limit prior to 65 and $1 will be withheld for every $3 in earnings above the limit. There is no limit on earnings once you attain age 65.

While that’s great news, the additional earnings may subject a portion of your Social Security benefits to income tax. Although the 2001 Tax Relief Act lowered tax brackets, there were no changes to the income limits that make Social Security benefits taxable. Earnings of more than $25,000 for an individual or $32,000 for joint filers can subject up to 50% of your Social Security benefits to tax. When your earnings exceed $34,000 for an individual or $44,000 for joint filers, up to 85% of Social Security benefits may be taxable.

It’s important to determine what the optimal level of earnings are for you early in the year, by estimating the tax bite. Earnings of $30,000 for an individual not only subject a portion of your Social Security benefits to tax, but the additional taxable income could bump you into a higher tax bracket which could put a deep dent into those extra earnings. When you do your taxes for 2001, You should also estimate your income, taxes and net income for 2002.

For more information, see J.K. Lasser’s Your Income Tax, 2002, $16.95.

February 2002