Social Security is a federal program providing monthly benefits to retirees, disabled workers and their survivors. The amount of your benefits depends on a number of factors.

Retiree Benefits

Generally, to be eligible for any Social Security benefit you must work at least 10 years. This will give you the requisite 40 credits needed for eligibility. However, in figuring benefits, earnings in the highest 35 years before retirement are averaged, and only earnings after age 21 are taken into account.

The amount of your monthly benefits depends on your earnings during your working years (not just the 10 years needed for eligibility) and whether you begin collecting benefits early, at full retirement age or at a delayed age.

Earnings taken into account. Each year you work at a job or are self-employed, you pay Social Security taxes on your earnings up to a wage base fixed annually by the Social Security Administration. For example, in 2015, the wage base is $118,500, so even if you earn more than this limit, only earnings up to it are taken into account for benefit calculation purposes. 

Early benefits. Even though you have not yet reached the full retirement age (explained later), you can begin collecting benefits as young as age 62. Collecting benefits early results in a permanent reduction of your benefits: one-half of 1% for each month that benefits commence before full retirement age for those with a full retirement age of 66 (there’s a greater reduction for those born after 1954).  

Full retirement age. The full amount of benefits to which you are entitled from your earnings history is paid at this age, which depends on the year of your birth.

Year of Your Birth

Full Retirement Age

1943-1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 and later

67

Delayed retirement. If you choose not to begin collecting benefits at full retirement age (or earlier), you can boost the amount of monthly benefits by delaying collection. The increase is two-thirds of 1% per month (8% annually). Thus, if you wait until age 70 to start benefits, you’ll receive 32% more in benefits for the rest of your life. However, once you reach age 70, no greater benefits can be earned.

Other Factors Affecting Benefits

If you continue to work and are receiving benefits before your full retirement age, you can lose some benefits if your earnings exceed a set limit. For example, in 2015, you lose $1 in benefits for each $2 in earnings over $1,310 per month ($15,720 for the year). Those who have reached full retirement age can earn any amount without any reduction in benefits. Note: As long as you continue to work, you continue to pay Social Security benefits, even if you are also collecting benefits.

Social Security benefits may be adjusted annually for inflation. For example, the 2015 benefits were increased by 1.7% because of increases in the Consumer Price Index. Due to minimal inflation during 2015, benefits in 2016 likely will not increase. 

Other Social Security Benefits

Retirees may have been the original beneficiaries of Social Security but they are not the only ones eligible for benefits at this time.

Disabled individuals. Those unable to do just about any type of work because of a physical or mental condition may qualify for Social Security disability benefits.

Disability means having a condition that is expected to last at least one year or result in death. Proving disability requires providing medical records; the process can take months. The amount of the benefits is figured in the same way as retiree benefits.

Spouses. A spouse can collect benefits based on his/her own earnings history or on that of a spouse, whichever is higher. A person who is at least 62 years old may collect as much as 50% of the benefits being paid to a retired spouse. A person collecting spousal benefits can switch to his/her own benefits when they are higher.

Divorced spouses who are at least 62 years old may also collect benefits based on the former spouse’s eligibility if the marriage lasted at least 10 years and is unmarried; the former spouse must be at least age 62.

Widows and widowers can collect benefits based on the deceased spouse’s eligibility as early as age 60, or as early as age 50 if disabled and the disability started within seven years of the worker’s death. 

Dependents of beneficiaries. Those who have a parent who is disabled or retired, or who died after working long enough to collect benefits, can collect benefits based on the parent’s eligibility. The child must be under age 18, or 18 or 19 and a full-time student still in high school, or 18 or older and disabled with a condition that started before age 22. The child must also be unmarried.

Income Tax on Social Security Benefits

Regardless of the reason for collecting benefits – as a retiree, disabled worker or survivor – benefits can be tax-free or included in income at the rate of 50% or 85%, depending on the amount of benefits and your other income. The Social Security Administration estimates that about 40% of those collecting benefits pay tax on them. 

The amount includible in income, if any, depends on your provisional income. This is the sum of your total adjusted gross income reported on your tax return plus 50% of Social Security benefits and all tax-exempt interest and minus certain adjustments to gross income (e.g., student loan interest, tuition and fees deduction).

The computation for determining the amount of benefits includible in income is complicated, but as a rule of thumb:

  • If provisional income exceeds $25,000 if you’re single, or $32,000 if you’re married filing jointly, include 50% of Social Security benefits in income (e.g., report this on line 20b of Form 1040).

  • If provisional income is more than $34,000 if single or $44,000 if married filing jointly, include 85% of benefits in income.

Those who are married filing separately and live with their spouse at any time during the year must include 85% of their benefits in income, regardless of their amount of provisional income. (For more on issues related to filing separately, see Top Reasons to File Separately When Married and Avoid The Social Security Tax Trap.)

Note: Be sure to check on your state’s income tax treatment of Social Security benefits. Even though benefits may be partially included in income for federal income tax purposes, they may be entirely tax-free for state income tax purposes.

The Bottom Line

Looking ahead, the rules about eligibility for Social Security benefits and taxation on them may change in order to keep the Social Security system afloat. For the present, you can get an estimate of the benefits you’ll collect in retirement by going to Social Security Retirement Estimator. You can learn more about federal income taxes on Social Security benefits from IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

For related reading, see How Married Couples Can Maximize Social Security and 4 Unusual Ways to Boost Social Security Benefits.

 

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