By NEIL DOWNING
The Providence Journal
10-NOV-05
Q: You mentioned that, after full retirement, you may earn as much as you can without having to fear forfeiting Social Security benefits. But if you earn more than $32,000 a year, isn't it true that you forfeit those benefits in the form of taxes, where the government takes 50 percent of your Social Security for every dollar you earn over that (threshold)?
D.V., Fall River, Mass.
A: You're confusing two separate sets of rules involving Social Security benefits. And you're not alone: many readers have made the same mistake, because these rules are so complicated. Here's a brief rundown:
Earnings Limit: If you start collecting Social Security retirement benefits early, before you reach your full retirement age and you continue to earn money from a job, you may have to forfeit some of your Social Security benefits. It depends on how much you earn; the dollar limit changes each year.
For example, if you're 62, draw Social Security benefits this year and continue to work, you'll have to forfeit $1 in benefits for every $2 you earn above $12,000.
But once you reach full retirement age, you may earn an unlimited amount from work without having to forfeit any benefits. "It's unlimited, without penalty," said Robert Muksian, professor of mathematics at Bryant University in Smithfield, whose area of study focuses in part on retirement issues, including Social Security.
(Your full retirement age depends on when you were born. For example, if you were born in 1940, your full retirement age is 65 and 6 months. If you were born in 1941, it's 65 and 8 months.)
For more details, see "Social Security: How Work Affects Your Benefits," published by the Social Security Administration. For your free copy, visit your local Social Security office, call the agency toll-free at 1-800-772-1213, or see its Web site:
www.socialsecurity.gov
Tax on Benefits: If you receive Social Security benefits, you may have to pay federal income tax on a portion of your benefits. It depends on your overall income. And there's a tricky calculation you must make to figure out whether some of your benefits will be taxed. Here's a summary:
First, you must add up all your income _ including any tax-exempt income you may have (such as interest from municipal bonds). Now add to that mix one-half of your Social Security benefits.
If the grand total exceeds a certain amount ($25,000 if you're single, $32,000 if you're married and file a joint return), then up to 50 percent of your Social Security benefits can be taxed.
If the grand total is even higher (greater than $34,000 if you're single, $44,000 if you're married), then up to 85 percent of your Social Security benefits can be taxed.
Confused? The following example, based on information from the Congressional Research Service, may help.
Joe is single and has $23,000 in adjusted gross income and $1,000 in income from tax-free municipal bonds. Half of his Social Security benefits equals $4,000.
The grand total comes to $28,000. It exceeds, by $3,000, that $25,000 threshold amount mentioned above. As a result, $1,500 of Joe's Social Security benefits will be taxed.
Why? In general, the portion of your Social Security benefits that'll be taxed is either half of the "excess" amount above that $25,000 threshold, or one-half of your Social Security benefits, whichever figure is less.
For more information, see Internal Revenue Service Publication 915, "Social Security and Equivalent Railroad Retirement Benefits." For a free copy, visit your local IRS office, call the IRS toll-free at 1-800-829-3676, or use this Web site:
www.irs.gov/formspubs
(Neil Downing is the author of "The New IRAs and How to Make Them Work for You." E-mail questions to moneyline@projo.com or leave a message at 401-277-7484. No personal replies, but as many questions as possible will appear here.)
(Distributed by Scripps Howard News Service, http://www.shns.com.)
