Understanding Social Security Earnings Test: Exempt Amounts and Excess Earnings, § 404.430

The Social Security earnings test is a measure used to determine the impact of a beneficiary’s earnings on their Social Security benefits.

This article explains the monthly and annual exempt amounts, as well as excess earnings, as defined in § 404.430 of the Social Security regulations.

Monthly and Annual Exempt Amounts: Exempt amounts refer to the wages and self-employment income that a Social Security beneficiary can earn without having their monthly benefits deducted due to excess earnings. There are two types of exempt amounts: monthly and annual. The monthly exempt amount applies only in a beneficiary’s grace year(s), while the annual exempt amount applies to earnings in non-grace taxable years before the year of full retirement age (§ 404.409(a)).

Calculating Exempt Amounts: The monthly and annual exempt amounts are calculated using the national average wage index. The lower exempt amount (before the calendar year of attaining full retirement age) is calculated by multiplying $670 (the lower exempt amount for 1994) by the ratio of the national average wage index for the second prior year to the index for 1992. The higher exempt amount (applicable in months of the year of attaining full retirement age) is calculated by multiplying $2,500 (the higher exempt amount for 2002) by the ratio of the national average wage index for the second prior year to the index for 2000.

Excess Earnings: Excess earnings are defined as the portion of a beneficiary’s earnings that exceed the exempt amount. For beneficiaries who have not yet reached their year of full retirement age, excess earnings for a taxable year are 50% of earnings above the exempt amount. In the taxable year in which a beneficiary reaches full retirement age, excess earnings are 33 1/3% of earnings above the annual exempt amount. Earnings after reaching the month of full retirement age are not subject to the earnings test.

Example of Exempt Amounts for Taxable Years 2000-2005:

Year	Lower Exempt Amount (Annual)	Lower Exempt Amount (Monthly)	Higher Exempt Amount (Annual)	Higher Exempt Amount (Monthly)
2000	$10,080	$840	$17,000	$1,417
2001	10,680	890	25,000	2,084
2002	11,280	940	30,000	2,500
2003	11,520	960	30,720	2,560
2004	11,640	970	31,080	2,590
2005	12,000	1,000	31,800	2,650

Example: How the Social Security Earnings Test Affects Benefits

Let’s consider a fictional beneficiary named John, who is 63 years old and collects Social Security benefits. John works part-time, and in 2023, he earns $15,000 in wages. Based on the Social Security regulations, the lower annual exempt amount for that year is $12,500 (for illustration purposes only, as the 2023 amounts are not provided in the original text).

Since John has not yet reached his full retirement age, we will use the lower annual exempt amount to calculate his excess earnings. Remember that the excess earnings for a taxable year are 50% of earnings above the exempt amount for beneficiaries who have not reached their year of full retirement age.

1. Calculate John’s earnings above the exempt amount: $15,000 (John’s earnings) – $12,500 (lower annual exempt amount) = $2,500
2. Calculate John’s excess earnings: 50% x $2,500 = $1,250

Due to John’s excess earnings, $1,250 will be deducted from his Social Security benefits for that year. Keep in mind that this is a simplified example, and the actual exempt amounts and calculations may vary depending on the specific situation and applicable regulations.

Conclusion: Understanding the Social Security earnings test and the exempt amounts is crucial for beneficiaries to manage their income and benefits effectively. By knowing the monthly and annual exempt amounts and the rules regarding excess earnings, beneficiaries can make informed decisions about their earnings and retirement plans.

https://www.ssa.gov/OP_Home/cfr20/404/404-0430.htm