With 22 percent of Americans in retirement and many receiving Social Security benefits, understanding how taxes affect that income should be a top priority.
While tight U.S. household budgets are forcing some older Americans to keep working, the bigger reason is that many simply want to.
“These days, people in their 60s and 70s are mentally and physically younger and more active than when I was much younger,” Joseph Favorito, a certified financial planner at Landmark Wealth Management, told NTD News.
Reality of Social Security Taxes When Working in Retirement
Taking Social Security and working in retirement could lead to some tax complexities if a working senior isn’t careful.“This is where many retirees are surprised,” Drew Stevens, PhD, founder at Wisdom to Wealth, a retirement income planning company, told NTD News. “Social Security benefits can become taxable depending on a person’s combined income, which includes adjusted gross income, non-taxable interest, and one-half of Social Security benefits.”
A Direct Path to Higher Taxes
For individuals, if combined income exceeds certain IRS thresholds, up to 85 percent of Social Security benefits may become taxable. “What many retirees fail to realize is that even part-time employment can push them into higher taxation territory,” Stevens noted.Additionally, before reaching full retirement age, earned income above the annual limit set by the Social Security Administration can trigger a temporary reduction in benefits.
Social Security Wage Taxes: By the Numbers
Whether full-time or part-time, Social Security wages are taxed as ordinary income.“Here, 15-50 percent of SS is exempt from federal taxes, and in most states, it’s exempt from state income taxes,” Favorito said. “Also, you don’t pay payroll taxes on SS benefits.”
- Single Filers: Up to 50 percent taxed if income is $25,001–$34,000; up to 85 percent taxed if over $34,000.
- Joint Filers: Up to 50 percent taxed if income is $32,001–$44,000; up to 85 percent taxed if over $44,000
Taxes Change Significantly at Full Retirement Age
Once an individual reaches full retirement age, the Social Security earnings limitation disappears entirely. “At that point, a retiree can earn unlimited wages without having benefits reduced due to earned income,” Stevens said.Solid Tips for Americans Who Want to Work While Collecting Social Security
Stevens' advice for U.S. seniors who want wage income is not to make Social Security decisions in a vacuum.“Too many people focus only on 'when' to collect benefits instead of understanding how working income, taxes, Medicare premiums, and retirement withdrawals interact together,” he noted.
- Their full retirement age
- The earnings limitation rules
- The potential taxation of benefits
- The impact on Medicare premiums
- How continued employment affects long-term retirement income sustainability
“The individuals who tend to make the best retirement decisions are those who approach retirement proactively rather than reactively,” Stevens added.