A Comprehensive Guide on How Excess Earnings Affect Your Social Security Benefits
When it comes to Social Security benefits, understanding the concept of excess earnings is essential. This blog post will break down the complexities of excess earnings and the Social Security earnings test to help you make informed decisions about your benefits.
Section 1: What are Excess Earnings? Excess earnings refer to the amount of income earned by an individual that exceeds the allowable limit set by the Social Security Administration (SSA). If you haven’t reached your full retirement age, excess earnings can result in a reduction of your Social Security benefits.
Section 2: How Excess Earnings are Charged The SSA charges excess earnings to your full benefit each month from the beginning of the year until all of the estimated excess earnings have been charged. However, excess earnings are not charged to any month described in §§ 404.435 and 404.436.
Section 3: Amount of Excess Earnings Charged The amount of excess earnings charged depends on the individual’s status. For the insured individual, each $1 of excess earnings will decrease their benefits, and the benefits of all others entitled on their earnings record, by $1. For beneficiaries other than the insured individual, their excess earnings are charged only against their own benefits.
Section 4: Charging Process when Both Insured and Beneficiary Have Excess Earnings If both the insured individual and a person entitled on their earnings record have excess earnings, the insured individual’s excess earnings are charged first against the total family benefits payable. Then, the excess earnings of the person entitled on the insured’s earnings record are charged against their remaining benefits.
Section 5: Earnings Test Applicability Public Law 106-182 eliminated the Social Security earnings test beginning with the month a person attains full retirement age for taxable years after 1999. In the year you reach full retirement age, the annual earnings test amount is applied to the earnings amounts of the months preceding your month of full retirement age. The reduction rate for these months is $1 of benefits for every $3 earned above the earnings limit. The earnings threshold amount will be increased in conjunction with increases in average wages.
Example: Calculating Excess Earnings and Social Security Benefit Reduction
Let’s assume Jane is 62 years old, has not yet reached her full retirement age, and started receiving her Social Security benefits early. In 2023, the annual earnings limit for individuals under full retirement age is $20,000. Jane earns an estimated $30,000 in 2023, resulting in excess earnings of $10,000.
Jane receives a monthly Social Security benefit of $1,000. According to the rules, for each $1 of excess earnings, her benefits will be reduced by $1. Therefore, Jane’s excess earnings of $10,000 will be charged against her monthly benefits.
Here’s how the process will work:
- Jane’s benefits are reduced by her excess earnings:
- $1,000 (monthly benefit) – $1 (reduction per excess dollar earned) = $999 (reduced monthly benefit)
- The SSA will charge her excess earnings to her benefits each month until the entire $10,000 has been charged:
- $10,000 (excess earnings) / $999 (reduced monthly benefit) ≈ 10 months
- For the first 10 months of the year, Jane’s Social Security benefits will be reduced to $0 due to her excess earnings.
- Starting in the 11th month, Jane will begin receiving her regular monthly Social Security benefit of $1,000 since her excess earnings have been fully charged.
It’s important to note that this example assumes Jane’s situation is not affected by any other special rules or exceptions, such as those mentioned in §§ 404.435 and 404.436.
Conclusion: Understanding the concept of excess earnings and how it affects your Social Security benefits is crucial for informed decision-making. By familiarizing yourself with the charging process, you can better plan your income and retirement strategy. Always stay updated on changes to the Social Security earnings test and thresholds to ensure you make the most of your benefits.
https://www.ssa.gov/OP_Home/cfr20/404/404-0434.htm
At Hugo Fierro & Michael Perez, we have the necessary expertise to provide expert guidance in comprehending the intricate subtleties of your Social Security disability claim.