What are the tax consequences of making more income than allowed by Social Security?

by Ibolya Balog, CPA | Aug 15, 2016

If you make more income than allowed by Social Security, are you taxed the full amount of your income by the IRS, realizing that for any dollar amount over the limit you are returning to Social Security $1 of every $2 you make?

There are two questions related to this inquiry: reduction in benefits and income taxes. The answer depends on the age of the person. 

The reduction in benefits applies to early retirees. In 2016, for a person born between Jan. 2, 1943, and Jan. 1, 1955, the full retirement age is 66 years. If the person is between age 62 and age 66, collecting Social Security benefits, and working but earning less than $15,720, there is no reduction in benefits. If they are in the same age group, receiving benefits, and earning more than $15,720, then there will be a reduction of $1 in benefits for each $2 earned above the earnings limit. Once the person reaches full retirement age (66 years for this example), there is no longer a reduction in benefits, regardless of the salary earned. 

There is a transitional earnings limit, in that if the person reaches age 66 in the current year, they can earn up to $41,880 in that year without any reduction in benefits.

With regard to income taxes, it depends on the person’s marital status and total income. For individual filers, if all of their other income (including tax-exempt interest plus half of Social Security benefits received) is less than $25,000, they do not pay any income tax on their Social Security benefits. For those with provisional income between $25,000 and $34,000, up to half of Social Security benefits are included in adjusted gross income. For individuals with more than $34,000 of provisional income, up to 85 percent of Social Security benefits is included in adjusted gross income. For joint tax return filers with less than $32,000 in provisional income, Social Security is not included in taxable income. For provisional incomes between $32,000 and $44,000, up to half of Social Security benefits may be subject to income tax, and for couples with income above $44,000, up to 85 percent of Social Security benefits may be included in adjusted gross income.

It’s important for people to understand these rules so that there is not an unexpected tax bill at the end of the year. The Social Security Administration has some helpful material to further explain this, plus the human resources department may also provide some helpful tips. Good luck!

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or locate a CPA near you.

Answered by: Ibolya Balog, CPA, is an associate professor at Cedar Crest College in Allentown, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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