Social Security benefits

By Frank Minuti, CPA

This time of year we get a lot of questions related to Social Security Benefits including: How much will I receive? When should I start receiving it? Can I continue working? Are the Social Security Benefits taxable?

Taxpayers approaching retirement age receive an annual statement from the Social Security Administration advising them as to their "full retirement age" and the amount of Social Security benefits they are entitled to receive. The statement will also show the reduced benefit levels they will receive (for the rest of their life) if they elect receiving benefits at or after age 62 and before full retirement age.

The decision as to taking reduced benefits early or waiting until full retirement is generally based upon a number of factors including health, economic need, life expectancy and current (and anticipated) working situation.

Full retirement age depends on the year of birth. A person born prior to 1938 receives full benefits at age 65, a person born between 1943 and 1954 receives full benefits at age 66 and a person born after 1959 receives full benefits at age 67. There is a schedule available on the Social Security Administration website detailing full retirement age based on the year of birth.

For example, if a person whose full retirement age is 67 starts taking Social Security early, their lifetime monthly benefits are reduced by 30% if taken at age 62, 25% at age 63, 20% at age 64, 13.3% at age 65 and 6.7% at age 66.

A taxpayer receiving benefits before full retirement age will lose $1 for every $2 of wages or self-employment income earned above $14,160 in years 2010 and 2011. For example a recipient earning $15,160 would have earned $1,000 over the limit and would have his/her future benefits reduced until the $500 is repaid.

Up to 85% of the Social Security benefits received can be taxable when the total of ½ of Social Security received and all taxable and tax-exempt incomes exceeds $25,000 for single taxpayers, $32,000 for married taxpayers filing jointly and $0 for married taxpayers filing separately.