By Elliot Raphaelson
From Tribune Content Agency
In a
recent column in Investment News, Mary Beth Franklin discussed issues related to payroll taxes and to lost potential Social Security benefits for those who apply prior to full retirement age.
Franklin has written an excellent ebook covering all Social Security issues, which you can order at www.maximizingsocialsecuritybenefits.com. Below are some typical questions I receive from readers and answers based on the topics Franklin discussed in her recent column.
Question: Do FICA taxes end when I reach full retirement age (FRA)?
Answer: No. In 2022, if you are an employee, 7.65 percent of the first $147,000 of your gross earnings is taxable regardless of whether you reached your FRA or not. What does that 7.65 percent fund? Think of it as two taxes: first, a tax of 6.2 percent funds Social Security benefits; then, a tax of 1.45 percent funds Medicare. Note that the Medicare tax is not limited; it applies to earnings in excess of $147,000.
If you are an employee, your employer pays an equivalent amount of payroll taxes on your behalf. If you are self-employed, your FICA taxes are 15.3 percent of your self-employed income up to $147,000.
Question: I have applied for a Social Security benefit at 62. I am continuing to work. Are there limits on income I can earn without having my Social Security benefit reduced?
Answer: After you reach your FRA, you can earn an unlimited amount from working without reducing your Social Security benefit. However, your total income will affect how much of your Social Security benefit is taxable. If you do continue to work before reaching your FRA, you will lose $1 in benefits for every $2 you earn over $19,560. If you reached your FRA in 2022, prior to reaching age 66 and four months, you can earn $51,960 prior to reaching your FRA without impacting your Social Security benefit. Above $51,960, you will lose $1 for every $3 you earn above $51,960. These limits change each year.
Question: If I apply for a benefit prior to FRA, and my benefit is reduced because of my earnings, will I ever recover the amount my Social Security benefit was reduced?
Answer: Yes. Fortunately, after your reach your FRA, Social Security will adjust your benefit.The amount you lost because of higher earnings prior to reaching your FRA will be returned to you in higher payments. You will receive a slightly higher benefit for the rest of your life to repay you for the penalties you incurred. It may take a number of years to recoup the penalty payments.
Question: Do Social Security beneficiaries pay income taxes on part of their Social Security benefits?
Answer: It depends on your income. Around 40 percent of Social Security recipients pay tax on some part of their benefit. Your Social Security benefit is taxable based on the level of your adjusted gross income (AGI) plus non-taxable interest plus one-half of your Social Security benefit. For individual tax returns, between $25,000 and $34,000 the taxable portion of your benefit may be as high as 50 percent. Above $34,000, up to 85 percent of your Social Security benefit is taxable. For a joint return, if the combined income is between 32,000 and $44,000, up to 50 percent is taxable; above $44,000, up to 85 percent is taxable.
A good source is IRS Publication 554: “Tax Guide of Seniors,” which available free from the IRS. This guide covers very important issues for senior citizens, including, alternatives for volunteer income tax assistance and tax counseling for the elderly. Also covered are instructions for computing taxable income regarding Social Security benefits, retirement plan, pension and annuity issues, long-term care tax deductions, sale of home issues, reverse mortgages, and deductions and credits available to senior citizens.
(Elliot Raphaelson welcomes your questions and comments at [email protected].)
©2022 Elliot Raphaelson. Distributed by Tribune Content Agency, LLC.
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