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Sunday, November 13, 2011


Question by Bill of Silver Spring, Maryland
Answer by JC Leahy, MA Accounting

I am receiving Social Security retirement benefits, but I also have to work for extra money to make ends meet. I am a self employed full-time painting contractor. Business has been really tough these past couple of years.  Last year, despite my full-time efforts, I made a net of zero at the painting business. This year, so far I have a net $70,000. This income won't reduce my monthly Social Security check, will it?

Bill, Congress has made our Social Security benefits into an unfortunate shell game. I won't tax your interest with all the details -- but here are the scraps that relate to your specific retirement planning question.

If you work after you start to receive Social Security benefits, your Social Security benefits may be reduced because of  your employment or self-employment income. This only affects you if you are receiving early Social Security retirement benefits. If you have reached your "full" retirement age, your benefits are NOT reduced as a result of other income. Early retirement age is 62. Your full retirement age depends on how young you are..

To determine your full retirement age according to the SSA, look for your birth year in this list
• 1937 or earlier: 65
• 1938: 65 + 2 months
• 1939: 65 + 4 months
• 1940: 65 + 6 months
• 1941: 65 + 8 months
• 1942: 65 + 10 months
• 1943-1954: 66
• 1955: 66 + 2 months
• 1956: 66 + 4 months
• 1957: 66 + 6 months
• 1958: 66 + 8 months
• 1959: 66 + 10 months
• 1960 or later: 67

For example, Bill, based on the above table your full retirement age is 65 years and 2 months because you were born in 1938. Your current age is 71. Since you are older than your full-benefits retirement age, your Social Security benefit will NOT be reduced because of your self employment earnings.

If you were, say 62, not only would you get a reduced Social Security benefit, but that reduced benefit would be FURTHER reduced by $1 for every $2 of income you made in excess of $14,160 annually. So, if you had a net of $70,000 from your painting business, your Social Security benefit would be reduced by ($70,000 - $14160) x 0.5 = $27,920 REDUCTION. In your case, Bill, $27,920 subtracted from your annual Social Security benefit would leave you a remaining Social Security retirement monthly check of approximately zero. It's a lucky thing they don't count negative numbers in that calculation, because if they did, Congress would want YOU to send THEM a check!! LOL!!!

Oh! Wait a minute!!  Au sérieux!  You might actually have to send Congress a check -- even if you ARE over the full retirement age. No kidding!!  Here's how it works. If you earn wages, salary, self employment income or any other kind of income while you are receiving Social Security -- Uncle Sam may want you to send some of that Social Security money back in the form of income tax .

Paying income tax on Social Security retirement benefits DOES seem unfair. After all, every payday for your entire working life you paid FULL Federal income tax, state income tax, and various payroll taxes on EVERY DIME of Social Security once already. To tax you again when you take the money back out of Social Security is to tax you TWICE!!!! But that's the way the system works. Originally, back in the New Deal era, all Social Security retirement benefits were exempt from this double-taxation but Congress just couldn't resist the temptation to change that.  You might call this the Raw Deal. 

It's definitley a bad investment.  Experts often say that your investment in Social Security is one of the least attractive investments you will ever make -- and when you delve into the details, it's not hard to see why.

So it's good-news and bad news for you, Bill. You are old enough so that your monthly Social Security check will not be reduced. You will, however, face double-taxation of some of your Social Security benefits.

I hope this helps. If you need more information, give me a call or enter a "comment" below.

(Question to young folks: So you think your Roth IRA benefits are going to be tax-free when you retire? Hmmmm....)

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