How Income Affects Social Security Benefits

How Income Affects Social Security Benefits

Strategies for navigating the world of Social Security

Navigating the world of Social Security can be confusing. We hear from clients all the time asking how different income types impact their Social Security benefits.

To understand how income affects Social Security, it’s important to differentiate between the Social Security Administration’s (SSA) four programs, because your income has a different impact depending on the program.

The SSA manages four programs:

#1—Social Security Retirement Benefits: Replacement income for qualified individuals in retirement.

#2—Social Security Disability Insurance (SSDI): Financial assistance for individuals with disabilities.

#3—Supplemental Security Income (SSI): Benefits for individuals with disabilities who have limited income and resources.

#4—Medicare: Health insurance program for people age 65 and older.

In this post, our focus is on Social Security retirement benefits; SSDI and SSI benefits, illustrating how your income impacts each program.

Social Security Retirement Benefits

Income affects your Social Security retirement benefits in the form of taxes.

For example: Do gambling or lottery winnings affect Social Security retirement benefits? Yes. The SSA considers gambling and lottery winnings unearned income and, therefore, it must be reported to the IRS.

Income Thresholds and Taxes

According to the SSA, when you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your income is more than $34,000, then up to 85% of your benefits may be taxable.

If you file a joint return—and you and your spouse have a combined income that’s between $32,000 and $44,000—you may have to pay income tax on up to 50% of your benefits. If your income is more than $44,000, then up to 85% of your benefits may be taxable.

Whether you earn money through gambling, self-employment, interest on investments, dividends or other avenues, that income must be reported on your federal taxes, potentially increasing your Social Security retirement benefits tax obligation.

An Often-Overlooked Social Security Income Strategy

Many investors focus on collecting as much Social Security retirement benefits as possible, overlooking the amount of money they’re actually keeping after taxes. Tax planning can help you determine when you should file for Social Security.

In fact, there are times when it makes financial sense to take Social Security benefits early. Sure, you’ll receive less benefits, but you may lower your taxable income, potentially allowing you to keep more money in your pocket.

The key question is: How can I keep myself in a lower tax bracket in retirement by effectively managing my retirement savings and Social Security benefits?

Our financial planners regularly help answer this question for clients using financial modeling strategies. Contact us if you need some help.

Tip: For more on Social Security, check out our blog post Answers to Popular Social Security Questions.

Good News for Some States

The IRS and most states tax Social Security retirement benefits; there are eight states that don’t.

States That Don’t Tax Social Security

New Hampshire
South Dakota

Income Reporting: The American Rescue Plan Act of 2021

If you’re collecting Social Security retirement benefits while also working a side hustle, like offering web design services on Upwork, driving for Uber, selling artwork on Etsy, or renting your second home on Airbnb, be aware of new IRS income reporting regulations—income that could potentially push you into a higher tax bracket.

As part of The American Rescue Plan Act of 2021, starting January 1, 2022, if you earn more than $600 annually, third-party settlement organizations, e.g., PayPal, Venmo, Cash App, eBay, Etsy, VRBO, etc., must report your income directly to the IRS using form 1099-K. Previously, the income reporting threshold was $20,000 with a minimum of 200 transactions.

Social Security Disability Insurance and Supplemental Income

Gambling winnings may increase taxes on your Social Security retirement benefits; however, they don’t affect SSDI benefits because they’re based on your work record before becoming disabled, not on your income or assets. The same is true for inheritances, lump sum settlements and rental income; they don’t impact SSDI benefits.

Yet these windfalls will likely reduce SSI benefits due to the program’s strict income limitations. For 2022, a non-blind individual receiving SSI benefits may not earn more than $1,350 a month or $2,260 a month for blind individuals.

Next Steps

There are many ways income affects your Social Security benefits. To help you stay informed, bookmark our Social Security exclusive suite of material.

If you’re unsure how to proceed, seek guidance from experienced financial professionals who understand Social Security’s ins and outs and can help you think through your approach.

Contact Adviser Investments anytime for assistance. We pride ourselves on being The Planner You Can Talk To.


Related Special Report

Social Security’s Role in Your Retirement

Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice.  Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation.

Our statements and opinions are subject to change without notice. All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

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