I'm a retired public safety worker and am currently 59yo and single. I am always reading and trying to stay informed. Presently I receive two public safety pensions that are to my belief not subject to the WEP or GPO. I consistently receive a 3% annual cola from one and do receive sporadic cola's from the other. Because I am not going to be totally reliant on Social security I am interested in receiving my SS benefits at 62 and estimated that I will receive about 73k in pension pay at that time. Further reasons is because of the nature of public safety service am in good to fair health but one never knows his true expiration date. Further I have done the math for waiting until FRA and 70, with the conclusion that 62 would better suit me.
Regarding these factors my question is twofold.
I have read that I will be subject to an 85% tax on my SS benefits and that I will also be subject to an Earnings test.
Can you please explain these 2 items in as broad a layman’s terms as possible.
Thank you for your time.
Regarding taxes, there's not an 85% tax on Social Security benefits. Instead, up to 85% of the amount that you receive from Social Security could be subject to income taxes. The applicable percentage, which could be as low as 0% to as high as 85%, is determined based on your total income level (https://www.ssa.gov/planners/taxes.html). That proportion of your benefit payments is then taxed at the normal tax rates assessed by the IRS.
For example, say you received $10,000 in Social Security benefits and 85% of that amount ends up being taxable as income. Then, lets say you are in a 15% income tax bracket. In that case roughly $1275 (i.e. $8500 x .15) of your Social Security benefits would end up going toward your income taxes.
The Social Security earnings test applies only to benefits payable prior to your full retirement age (FRA). In years prior to the year in which you reach FRA, $1 of your benefits would need to be withheld for each $2 that you earn in excess of that year's earnings test exempt amount (https://www.ssa.gov/planners/retire/whileworking.html). The exempt amount for 2019 is $17,640. However, for people reaching FRA in 2019 the exempt amount is $46,920, and the amount withheld is $1 for every $3 that they earn in excess of $46,920 in the months prior to the month that they reach FRA.
For example, say that you turned age 62 on January 1 2019 and filed for your benefits effective with January 2019. In this example we'll assume that your benefit rate is $1000 per month, and you will earn $27640 this year. Based on the earnings test rules, $5000 of your benefits would then need to be withheld due to the fact that you would be earning $10000 more than the earnings test exempt amount (i.e. ($27640 - $17640)/2). As a result, Social Security would need to withhold 5 months of your benefits due to your earnings, but you could then be paid for the remaining 7 months of 2019.
Before making a final decision on when to file for your benefits, you may want to strongly consider using our software to fully explore and compare all of your filing options.