Personal Finance Topic #266 ? Job Loss... | Gather

by Jeff S.

Member since:
August 16, 2008

Job Loss and Retirement ? Part 8

Social Security benefits and Income Tax

Workers 62 and older who lost his employment or whose income has dropped?substantially?start thinking about supplementing his income by requesting Social Security payout before he reaches his Full Retirement Age (FRA). ?This could mean a?substantial?cut in his SS benefit amount for the remainder of his life when compared to the benefit at his FRA, and his benefit maybe subject to a hefty penalty if he continues to work.

Let's take a look at the Social Security tax structure for this scenario:

• • you are 62 or older,
  • receiving pension or other income (interest, dividend, etc.), and
  • receiving Social Security income

• File a federal tax return as a single and your combined income (adjusted gross income + Nontaxable interest + ? of your SS benefits) that is
  • between $25K and $34K, you pay tax on 50 % of your SS benefits
  • more than $34K, 85 % of your SS benefits is taxable.
• File a joint return, and you and your spouse have a combined income (adj. gross income + Nontaxable interest + ? of your SS benefit) that is
  • between $32K and $44K, you pay tax on 50 % of your SS benefits
  • more than $44K, 85 % of your SS benefits is taxable.

• Penalty if you work while receiving SS benefits (2012 numbers):
  • In 2012, if you work prior years and you are younger than full retirement age during all of 2012, SS will deduct $1 from your benefits for each $2 you earned above $14,640.
  • If you reach FRA during 2012, SS will deduct $1 from your benefits for each $3 you earn above $38,880 until the month you reach FRA.? After reaching your FRA, there is no SS deduction with any amount of earnings.

My recommendation is to hold off on receiving Social Security benefits until your FRA (66 or 67 for most people) , or if you can afford to, start at age 70. ?If you start receiving Social Security benefit before your FRA, be aware of the potential penalty AND the tax hit.

Bad news: The tax thresholds are NOT indexed to inflation

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