What Income Reduces Social Security Benefits?

What Income Reduces Social Security Benefits?

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Editor’s Note: This story originally appeared on SmartAsset.com.

If someone receiving Social Security benefits earns money by working, the Social Security Administration may reduce the amount of that person’s benefits.

This only affects people who start taking benefits before reaching their full retirement age as set by the SSA. And only income earned from working has this effect.

Other types of income, such as dividends, interest and capital gains from investments, aren’t counted by Social Security for this purpose.

Here’s how it works.

Earning While Receiving Social Security Benefits

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Opting to receive Social Security retirement or survivor’s benefits does not mean you can’t get income from other sources. And extra money from a part-time job or from investments can help stretch a Social Security check and make retirement more comfortable.

However, people who opt to receive their benefits before reaching full retirement age — age 67 for people born in 1960 or later, for example — can only earn so much each year before Social Security starts reducing their benefits. The earnings cap is adjusted for inflation. For 2021, it is $18,960.

Once annual earnings reach the cap amount, for every $2 a Social Security recipient under retirement age earns from working, the total annual benefit gets reduced by $1.

For instance, say a recipient gets $1,000 a month in benefits and starts a part-time job that pays $20,000 a year. Subtracting $18,060 from $20,000 yields $1,040. Dividing $1,040 by 2 gives $520. This is the amount by which Social Security will reduce the annual benefit.

People can earn $50,520 before reaching full retirement age without affecting their benefits. And the amount of reduction is also just $1 for every $3 earned over the cap.

In addition, income only counts against the cap until the month before full retirement age is reached. This means a person who reaches full retirement age in November after earning $50,000 during the first 10 months of the year would have no reduction in benefits.

After full retirement age, there is no cap on earnings. A recipient can earn any amount without affecting their benefits. This starts with the month a Social Security recipient reaches full retirement age.

So the recipient in the above example would continue to receive full benefits after reaching full retirement age in November, no matter how much he or she earns.

Income Sources

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Not all income is equal when it comes to the Social Security earnings cap. Generally, any income that comes from employment counts against the earnings cap. Here are examples of the kinds of income that count against the cap:

  • Wages and salary paid by an employer
  • Net income from self-employment
  • Bonuses
  • Commissions
  • Vacation pay

Income from sources other than working is not included. Some of the income sources that don’t affect Social Security benefits include:

  • Dividends
  • Interest
  • Capital gains
  • Rental income
  • Pensions
  • Annuities
  • Military and government retirement benefits
  • IRA distributions
  • Inheritances
  • Lawsuit settlements

Note that income earned before starting to receive Social Security does not count either. This could include stock options, back pay, bonuses and payments for unused vacation or sick leave.

Even if these payments arrive after starting to receive benefits, they aren’t included against the cap as long as they were earned before benefits started.

More on Earning Income While Getting Benefits

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If benefits get reduced because an underage Social Security recipient earns more than the cap amount, the money isn’t actually lost. It’s only delayed. After the recipient reaches full retirement age, Social Security will recalculate the benefit. The new benefit will be higher to make up for payments that were withheld because of excess earnings.

Sometimes, earning money while receiving Social Security can also increase your benefit amount. This can happen if, during a year you receive Social Security benefits, you earn enough money to make the year one of your highest-earning years. Social Security calculates benefits based on a worker’s highest-earning years. So adding a new high level to your earnings record could cause your benefit to increase.

There are different rules for people getting Social Security disability or Supplemental Security Income benefits. These people have to report all earnings to Social Security. In addition, people who earn money for working outside the U.S. are treated differently.

Keep in mind that Social Security uses an estimate for earnings during the coming year when calculating benefits. Recipients are expected to provide an earnings estimate to help the agency calculate benefits. If it appears that earnings will be different from the estimate, recipients are supposed to inform Social Security as soon as possible.

Bottom Line

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Social Security recipients who have reached full retirement age can earn as much as they want from any source without it affecting their benefits. However, those who start taking benefits before reaching full retirement age may have their benefits reduced if they earn above a certain amount. Some types of income don’t count against the cap. Those include dividends, interest and capital gains from investments, as well as pensions, annuities and some other sources.

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