Understanding Social Security Deductions Due to Excess Earnings, § 404.415

The Social Security Administration (SSA) enforces an annual earnings test for those receiving benefits who have not yet reached full retirement age.

This test ensures that benefits are reduced if an individual earns above a certain threshold. In this blog post, we will discuss the three main types of deductions due to excess earnings, as outlined in § 404.415.

1. Deductions for Insured Individual’s Earnings (§ 404.415(a)): If an individual receiving benefits has excess earnings (as described in § 404.434) and is under full retirement age (as defined in § 404.409(a)), their monthly benefits will be reduced. This reduction is applied for each month in a taxable year when they are under full retirement age.
2. Deductions from Dependent’s Benefits (§ 404.415(b)): The SSA may also reduce the benefits payable to a spouse or child on an insured individual’s earnings record if the insured individual has excess earnings. However, beginning with January 1985, divorced spouses who have been divorced for at least two years are exempt from this reduction.
3. Deductions Due to Excess Earnings of Other Beneficiaries (§ 404.415(c)): If a beneficiary (other than the insured individual) has excess earnings (as described in § 404.430) charged to a month, their benefits for that month will be reduced under the annual earnings test. The deduction equals the amount of the excess earnings. For disabled children receiving benefits, their eligibility is assessed using the Substantial Gainful Activity guidelines (as described in § 404.1574 or § 404.1575).

Example: Jane’s Social Security Benefits and Excess Earnings

Jane, a 62-year-old woman, has decided to continue working part-time while also receiving her Social Security retirement benefits. In 2023, the annual earnings limit for those under full retirement age is $20,000. Jane earns $25,000 in 2023, which puts her $5,000 above the annual earnings limit.

1. Deduction for Jane’s Excess Earnings: Since Jane is under her full retirement age and has excess earnings, her Social Security benefits will be reduced. The SSA uses a specific formula to determine the reduction amount, but for the sake of simplicity, let’s assume her benefits are reduced by $2,500 for the year.
2. Deduction from Dependent’s Benefits: Jane’s husband, John, is also receiving benefits based on Jane’s earnings record. Due to Jane’s excess earnings, John’s benefits will also be reduced for the year. Again, the exact reduction amount would be determined by the SSA, but let’s assume his benefits are reduced by $1,250 for the year.
3. Deduction Due to Excess Earnings of Other Beneficiaries: If Jane and John had a child who was receiving benefits on Jane’s earnings record, and the child also had excess earnings, their benefits would be reduced as well. For example, if the child earned $3,000 above the annual limit, their benefits would be reduced by that amount ($3,000) for the year.

In this example, Jane’s decision to continue working and earn above the annual limit has led to deductions in her own benefits, her husband’s benefits, and potentially her child’s benefits if the child also had excess earnings. It’s important to consider these potential reductions when planning your financial situation while receiving Social Security benefits.

Conclusion: It’s crucial to understand the implications of excess earnings on Social Security benefits, particularly for those who have not yet reached full retirement age. By familiarizing yourself with the three types of deductions, you can better anticipate how your earnings might impact your benefits and those of your dependents.

https://www.ssa.gov/OP_Home/cfr20/404/404-0415.htm