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Ask Rusty: Paying income taxes on social security benefits

Dear Rusty: I understand that after I reach full retirement age, I no longer have a limit on how much I earn. I retired one year early (65), and am now 76, but I am still being taxed on a portion of my SS benefits. I am not working and making extra money. However, my wife is still working, and I get two small annuities per month. But when I file income tax I am told we made enough for me to be taxed on a portion of my Social Security benefit. I even checked to see if filing married but separate returns would help and it was not as good as joint returns. So maybe you can explain this to me.

Signed: Taxpaying Senior

Dear Taxpaying Senior: I’m afraid you’re speaking of two different things. You are correct that once you reach your full retirement age there is no longer a limit on how much you can earn from working before your monthly Social Security benefit is reduced. But that is something totally different from paying income tax on your Social Security benefits.

Social Security’s “earnings limit” looks only at your earnings from employment (or self-employment) to decide if they should take back some of your benefits before you reach your full retirement age. However, whether or not your Social Security benefits are taxable income is determined by your “combined income,” which includes your adjusted gross income as reported to the IRS, plus any non-taxable interest you may have had, plus 50% of your total Social Security benefits for the tax year. This is often referred to as your “modified adjusted gross income” or “MAGI” and it’s how the IRS determines if, or how much, of your Social Security benefit is taxable income. As a couple filing your income taxes as “married – filing jointly” if your MAGI is over $32,000 then up to 50% of your annual Social Security benefit amount is taxable, and if your MAGI is over $44,000 then up to 85% of your Social Security income becomes taxable. Note that the combined income levels are different, and lower, when you file your taxes individually.

The “earnings limit” is a rule imposed by Social Security to recover some benefits paid if the limit is exceeded due to your earnings from working. Taxation of Social Security benefits is done by the IRS (not Social Security) and it’s the IRS who determines if your Social Security benefits will add to your income tax burden. And while the Social Security earnings limit goes away once you reach your full retirement age, there is no such relief from the IRS at any age when it comes to paying income tax on your Social Security benefits.

Dear Rusty: I know that when a person turns 65 he or she must enroll in Medicare. I have been informed that the charge for this would be deducted from the Social Security benefit, if it has been claimed. Otherwise, this will be another payment for my medical care, in addition to my existing coverage. Please explain the relationship between the two programs and considerations in timing the claim for the SSA benefit.

Signed: Frugal Senior

Dear Frugal Senior: If you are already collecting Social Security benefits you will be automatically enrolled in Medicare about 3 months prior to your 65th birthday but, if not, enrollment can be done by contacting Social Security directly. You must enroll in Medicare at age 65, unless you have other “creditable” healthcare coverage (such as from an employer) or you will be subject to a late enrollment penalty for enrolling after expiration of your initial enrollment period (your “IEP”). Your “IEP” is a seven-month window which starts 3 months before the month you turn 65 and ends 3 months after the month you turn 65. You should check with your employer to make sure your existing coverage is “creditable” and, if it is, you can delay enrolling in Medicare until such time as that other coverage ends and thus avoid a late enrollment penalty for not enrolling in Medicare Part B during your IEP. When your employer coverage ends, you’ll enter a “special enrollment period” during which you can enroll in Medicare Part B (and Part D, which is prescription drug coverage) without incurring a late enrollment penalty.

Medicare Part A (hospitalization coverage) is free if you are also eligible for Social Security benefits (you don’t have to be collecting SS, only eligible). Medicare Part B provides coverage for doctors and outpatient services and there is a premium associated with it ($135.50 for 2019). If you have other creditable coverage you can avoid paying the Part B premium by not enrolling during your IEP. If your existing plan also provides creditable prescription drug coverage, you can also defer enrolling in a Medicare Part D plan until your employer coverage ends, at which time you will have 63 days to take a Part D plan without incurring a late enrollment penalty. FYI, you must be enrolled in Medicare Part A to collect SS benefits after you are 65 years old, and since Part A is free for anyone eligible for Social Security, there is little reason to not enroll in Part A at age 65 (unless you have a Health Savings Account (HSA), in which case there are special rules to consider).

Although you enroll in Medicare via Social Security, they are two very separate and distinct programs. Normally, if you are collecting Social Security benefits your Medicare Part B premium is automatically deducted from your Social Security benefit. But if you wish to delay collecting Social Security and want to enroll in Medicare Part B, you can do so and request alternate Medicare Part B premium payment arrangements, for which there are several options.

As for the timing of your claim for Social Security benefits, you should evaluate your need for the money, your current health and your expected longevity. If you don’t need the money now and expect to live to at least average life expectancy (about 87 for women and 84 for men) then delaying your claim for SS as long as possible will yield you the highest monthly benefit amount as well as the most in lifetime SS benefits. For each year you delay claiming Social Security beyond your full retirement age you’ll get an additional 8% on your monthly benefit, and you could get as much as 32% more (depending on your FRA) at age 70. Age 70 is when your benefit would reach maximum so you shouldn’t wait beyond age 70 to claim Social Security.

This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website or email us.