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Income versus Social Security

Everyone should be familiar with the idea that as we earn income, we pay a portion of those earnings into Social Security through the payroll tax. The tax is paid directly by the earner and the employer (which may be the same person for the self-employed). However, most people are not familiar with the rules that apply regarding income when we are receiving Social Security benefits and this can prove costly.
 
For example, if you are still working while receiving Social Security before you have reached your full retirement age, your benefits will be reduced by one dollar for every two dollars of gross earnings you receive above $15,720 in a calendar year. This can effectively reduce your actual benefit significantly and would affect your budget and planning.  
 
Even after you have reached your full retirement age – as well as before that time – Social Security benefits may be partially taxable as income if your income (not just your earnings) exceeds specified levels for single persons and those who are married filing jointly. Without going into detail, as much as 85% of a portion of your benefit may be added to your taxable income, increasing your tax liability.
 
At age 65, most of your will be eligible for and sign up for Medicare. The amount of your monthly premium will depend to some extent on your income and high earners may find their premium to be substantial. Since the Medicare Part B premium is taken directly from your monthly Social Security benefit (and you may opt to have the Part D premium also automatically withdrawn) the impact on your actual Social Security benefit received is again a factor.

The point of this discussion is to raise awareness about how your Social Security benefit amount may not add up to what you planned on receiving and that also means that you will get less – not more – than you initially thought. This can impact your retirement plan and spending in retirement and should not be ignored. 

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