For Employees Born Between 1955 and 1959 and Receiving Social Security Retirement Benefits During 2021, Beware of the “Earnings Test”
Edward A. Zurndorfer
Social Security benefits are designed to replace a portion of the earnings an individual (and in some cases his or her family) loses because of the individual’s retirement, disability, or death. The implication of this is that the amount of Social Security benefits received each year will depend on whether the individual is fully or partially retired.
The Social Security Administration (SSA) uses what is called the “earnings test”, also referred to as the “retirement test”, to: (1) measure the extent of an individual’s retirement; (2) determine the amount, if any, to be deducted from the individual’s Social Security monthly retirement benefit; and (3) measure the work activity of family members entitled to family benefits based on the individual’s Social Security earnings record and the amount of benefits payable to them.
The “earnings test” does not apply to an individual who has reached “full retirement age” (FRA). FRA is between age 65 and 67 and depends on an individual’s year of birth. Since individuals born before January 2, 1955 have an FRA of age 65 or 66, any individual born after January 1, 1955 has not reached his or her FRA. Also, because an individual can start his or her Social Security monthly retirement benefit as early as age 62, this means that any individual born between Jan. 2, 1955 and Dec. 31, 1959 is eligible to receive his or her Social Security monthly retirement benefit during 2021. However, if these individuals are also working during 2021; that is, receiving a salary and/or self-employed and have net self-employment income, they are subject to the Social Security “earnings test”, now discussed in detail.
Social Security earnings (an individual’s salary in which Social Security or FICA taxes are paid) directly affect the amount of an individual’s future Social Security retirement benefits. An individual’s Social Security earnings each year will be reported in Box 5 of the employee’s W2 form (“Social Security Wages”) and sent to the SSA by the employee’s employer each January. In fact, the SSA computes every year an individual’s future retirement benefits based on the individual’s 35 highest years of Social Security earnings. The larger the individual’s lifetime Social Security earnings, the larger will be the individual’s future retirement benefits.
The SSA obtains information about an individual’s Social Security earnings each year when a copy of the individual’s W-2 is sent to the SSA. For self-employed individuals, self-employment income is reported on an individual’s federal income tax return (Schedule SE) and IRS sends a copy of Schedule SE to the SSA.
If an individual is between age 62 and the year he or she becomes FRA, excess earnings are 50 percent of the Social Security earnings in excess of the “exempt” amount. Each year, the SSA announces the “exempt” amount. During 2021, the “exempt” amount for individuals younger than the year they reach FRA, working and receiving Social Security benefits is $18,960. The SSA “earnings test” applied during 2021 to working individuals between age 62 and the year they become FRA and receiving their Social Security retirement benefits is: For every $2 the individual earns above $18,960 during 2021 ($1,580 per month), the SSA will take back $1 of the individual’s Social Security retirement benefits.
The following example illustrates:
Example 1. Sarah, age 63, is a federal employee working part time and earning $30,000 during 2021. She is also receiving Social Security benefits of $14,000 during 2021. Sarah’s “excess earnings” during 2021 are equal to $30,000 less $18,960 or $11,040. 50 percent of $11,040 is $5,520. This means that Sarah will lose $5,520 of her $14,000 Social Security benefits.
In the year FRA is reached, excess earnings are 33 1/3 percent of the Social Security earnings in excess of the exempt amount. During 2021, individuals born between January 2 and December 31, 1955 reach FRA. FRA for these individuals is 66 years and 2 months. Their exempt amount is $50,520. For every $3 these individuals earn above $50,520 between Jan. 1, 2021 and the month they reach FRA, they will lose $3 of their benefits. The following example illustrates:
Example 2. Steven is currently working and earning $130,000 during 2021. Steven will become age 66 on May 16, 2021. He started receiving his Social Security retirement benefit of $27,000 per year on Jan. 1, 2021. Steven becomes FRA in July 2021 (age 66 and 2 months). Between Jan. 1, 2021 and June 30, 2021 Steven earns $65,000.
$65,000 less $50,520 equals $14,480
33 1/3 percent of $14,480 equals $4,826
Steven’s monthly Social Security will be reduced for the six-month period between Jan. 1, 2021 and June 30, 2021 by $4,826, or $4,826/6 equals $804.36 per month.
Any salary Steven earns after June 30, 2021 will not affect his Social Security retirement benefits.
The following is a summary table of the SSA earnings test rules during 2021 for those federal employees who are both working and receiving their Social Security retirement benefits during 2021, and who were born between Jan. 2, 1955 and Dec. 31, 1959.
|Year Born||Rule||2021 Earned Income Limit||Benefit Repayment Rule|
|1956, 1957,1957 and 1959||Limit applies to earned income. There is no limit on unearned income (investment income, pensions, IRAs, rental income, etc.)||$18,960||For every $2 of earned income above $18,960, the SSA takes back $1 of the Social Security benefit|
|1955 (FRA is age 66 years and 2 months)||Earned income through the end of the month before becoming FRA||$50,520||For every $3 of earned income above $50,520, the SSA takes back $1 of the Social Security benefit|
|1955 (starting two months after 66th birthday)||Month becoming age 66 years and 2 months||No limit on earnings||Not applicable|
Impact of Excess Earnings
As explained above, excess earnings are charged against the individual’s Social Security monthly retirement benefits. The deductions begin with the first chargeable month of the tax year and continue until all excess earnings have been charged. The following examples illustrate this reduction.
Example 1. Sarah lost $5,520 of her benefits. $5,520/12 equals $460. Starting in January 2021 Sarah lost $460 of her benefit.
Example 2. Steven is losing $804.36 per month starting in January and ending in June 2021.
If Social Security retirement benefits are reduced because of the individual’s excess earnings, then the excess earnings will also reduce the total family benefit. The family benefit includes all monthly benefits, other than Social Security disability benefits, payable to the individual and other family members such as spouse and children, entitled to benefits on the individual’s earnings record. The following example illustrates:
Example 3. Charles, age 64, is entitled to a monthly Social Security retirement benefit of $1,200. His wife and child are both entitled to a family benefit of $600. Charles is working during 2021 and has excess earnings of $7,200. These excess earnings are charged against the total monthly family benefit of $2,400 ($1,200 plus (2 times $600)). This means that no total monthly benefit of $2,400 is payable to the family for the months of January, February, and March 2021 (three times $2,400 equals $7,200).
But if a survivor or other person entitled to benefits on the Social Security record of another individual has excess earnings, only that individual’s monthly Social Security benefit amount is charged and deducted.
Example 4. Same facts as in Example 3 except that Charles’ wife has excess earnings of $2,400 which is charged only against her monthly benefit of $600. She therefore receives no payments for January through April 2021 (four times $600 equals $2,400).
Finally, it needs to be emphasized that any lost monthly retirement benefits as a result of excess earnings are not permanent reductions to the Social Security monthly retirement benefit an individual is entitled to. At the time of year that the excess earnings have been “paid back”, the individual will be restored to his or her entitled monthly benefit.
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Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.