20 Nov How Social Security benefits are taxed, and what changes if you work

 Q. I keep hearing different answers. When I start taking Social Security, will the benefits be taxed? And what happens if I’m still working when the payments start?

A. That depends.

Social Security benefits may be subject to federal taxes depending upon how much other income you have.

In order to find out the answer, taxpayers must compare their Modified Adjusted Gross Income (MAGI) to a threshold number, which varies according to your marital status, said Howard Hook, a certified financial planner and certified public accountant with EKS Assoc. in Princeton.

“Generally, MAGI includes all taxable income plus tax-exempt interest,” Hook said. “To this number, you then add half of your Social Security benefits.”

If this amount is less than $25,000 for single taxpayers, or $32,000 for married taxpayers, then your Social Security benefits are not taxable, Hook said. Once the amount exceeds those thresholds, a portion of your Social Security income will be subject to income tax. The maximum amount of benefits that can be subject to income tax is 85 percent of those benefits, Hook said.

If you are still working when payments begin, Hook said your earnings are taken into consideration when calculating how much of the benefit is subject to income tax.

Even worse, he said, if you start collecting before reaching your normal retirement age and are still working and earning in excess of certain thresholds, you may have to give back benefits to the Social Security Administration.

Hook offered this example: If you begin collecting at age 62 and earn more than $15,480, you will have to give back $1 for every $2 you earn in excess of $15,480. In the year you reach full retirement age, the earnings threshold is $41,400, and the give back is $1 for every $3 earned in excess of the threshold prior to reaching normal retirement age. Once you reach full retirement age, there are no limits as to the amount of money you can earn and still collect full benefits, he said.

To learn more about how your benefits might be taxed, check out Social Security’s benefits planner.

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This story was first posted in November 2014.