Most questions we financial advisors receive about Social Security relate to when clients are required to start, when it is optimal to start, and how much will they lose or gain by claiming before or after full retirement age. I was recently preparing a presentation about these topics. Then I dug into the taxation of Social Security benefits and was reminded of Robert Kiyosaki’s quote, “It’s not how much money you make, but how much money you keep.”

In 1983 the Regan administration passed legislation to begin taxing up to 50% of Social Security benefits. In 1994 the Clinton administration began taxing up to 85% of benefits. Both pieces of legislation had income thresholds. See the chart for details. 

 

50% of Benefits Taxed

2023

1994

1984

Single, HH, Filing Separately

$25,000 – $34,000

$25,000 – $34,000

>$25,000

Filing Joint

$32,000 – $44,000

$32,000 – $44,000

>$32,000

85% of Benefits Taxed

   

Single, HH, Filing Separately

>$34,000

>$34,000

 

Filing Joint

>$44,000

>$44,000

 

 

In the past three years (2021-2023), Social Security’s aggregate cost of living adjustment (COLA) was 17.8%. The last 3-year rolling period the COLA was this high was the 1981-1983 timeframe, which was 22.1%.

There has not been meaningful Social Security benefit tax legislation in 30 years. Benefits have steadily increased through the years, but the taxable income tiers have not been indexed with benefits. 

According to the Social Security Administration, “Since 1984, the proportion of beneficiary families whose benefits are taxed has risen over time from less than one in 10 to more than half. By 2030, MINT [Social Security Administration’s forecasting program] projects that 58 percent of beneficiary families will owe income tax on their Social Security benefits.” However, this study was issued in December 2015, and it assumed Congress would amend the tax code to adjust the tax brackets, which it has not. This has resulted in more Social Security beneficiaries falling into the taxable tiers.

No rule says you can’t continue to work while receiving Social Security benefits. While having 70% of a dollar is better than none at all, you just have to be mindful of how much you’re earning if you’re under full retirement age and receiving benefits.

For 2024, Social Security recipients who have not yet reached full retirement age can earn up to $22,320 without dinging their benefit amount. If your earnings exceed the limit, your Social Security benefits will be reduced by $1 for every $2 you’re over the limit.

In the year you reach full retirement age, the reduction becomes $1 for every $3 earned over the limit, which is $59,520 for 2024. Social Security will only count your earnings up to the month before you reach full retirement age, not your earnings for the entire year.

The good news is that once you reach full retirement age, you can earn as much as you like without your benefits being penalized. But keep an eye on the impact that your earnings amount might have on your tax liability.

Social Security can be confusing. It feels easy to go along with what your relative, colleague, or neighbor is doing. Yet because everyone has a different situation and there are many claiming strategies available, you should determine what’s best for you based on your age, life expectancy, income needs, and other retirement assets. A little bit of individualized planning may help you hit your golden year goals.

Our team is happy to help in this way. We use comprehensive financial planning software programs to model client-specific scenarios. Please contact us if you have questions so we can help you optimize your benefits. 

March 7, 2024

Social Security: Cost of Living and Taxation

Most questions we financial advisors receive about Social Security relate to when clients are required to start, when it is optimal to start, and how much […]
September 22, 2023

Who’s Watching Your 401(k)?

BCS Wealth Management is an independent financial planning firm. One of the benefits of independence is flexibility to explore and choose industry-leading technology solutions. In previous […]
September 8, 2023

401(k) Day 2023

September 8, the Friday after Labor Day, marks National 401(k) day. It’s the day Americans are encouraged to check in on their retirement readiness. 401(k)s and […]
November 3, 2022

Cyber Security and Account Protection

According to a 2017 study by the Clark School at the University of Maryland, there are around 2,200 cyberattacks per day, which could equate to more than […]
December 3, 2021

Year-End Financial Planning Reminders

1. Social Security Cost of Living Adjustment (COLA) for 2022. The SSA announced the 2022 Cost of Living Adjustment of 5.9%, the largest increase in 40 […]
September 10, 2021

National 401(k) Day

In the spirit of National 401(k) Day, we have four suggestions about how to celebrate. 1. Review your beneficiaries. When a major life event occurs, the […]
August 13, 2021

Financial Awareness Day

August 14 is National Financial Awareness Day! A famous framework in the study of psychology is Maslow’s Hierarchy of Needs. It is a construct for explaining […]
July 13, 2021

Summer Construction Projects, Continued

Summer is not over yet, and lumber futures prices are falling. We happened to publish our last article about lumber nearly at the peak of this […]
May 11, 2021

Thinking of a Summer Construction Project?

Most people do not track commodities futures. However, we are all financially affected by raw material prices whether it is orange juice, cotton, corn, or the […]
Form ADV Part 2A
Form CRS