Advanced Underwriting Consultants

Ask the Experts – April 3

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers.  Here’s the question of the day.

Question: My client, age 62, is planning on working for the first half of this year and then retiring and filing for Social Security benefits. He expects to earn about $45,000 in the first half of the year. Will his Social Security benefits be reduced in 2014?

Answer: Probably not, but it depends on how much your client earns per month after he files for his retirement benefits.

Ordinarily, if an individual is younger than full retirement age (FRA), there is a limit to how much he can earn and still receive full Social Security benefits. If the individual is younger than FRA during all of 2014, the Social Security Administration (SSA) deducts $1 from the retiree’s benefits for each $2 he earns above $15,480. If he reaches FRA in 2014, the SSA deducts $1 from his benefits for each $3 he earns above $41,400.

Therefore, under the general rule, your client’s Social Security benefits would be decreased by about $15,000 on the year (i.e. the difference between his $45,000 yearly earnings and the $15,480 limit, divided by 2).

However, there’s a special rule that applies to the first year of retirement when the individual files for benefits mid-year. Under this rule, he can receive his full Social Security check for any whole month he’s retired, regardless of his first-half earnings, as long as he earns $1,290 or less each month thereafter. However, if the retiree earns more than $1,290 in any month, his Social Security benefit for that month will be completely withheld. After 2014, the $15,480 yearly threshold (indexed for inflation) will apply in until the year in which he reaches FRA.

Here’s an example from the SSA to provide further illustration of the rule:

John Smith retires at age 62 on October 30, 2014. He will earn $45,000 through October.

He takes a part-time job beginning in November earning $500 per month. Although his earnings for the year substantially exceed the 2014 annual limit ($15,480), he will receive a Social Security payment for November and December. This is because his earnings in those months are $1,290 or less, the monthly limit for people younger than full retirement age. If Mr. Smith earns more than $1,290 in either of those months (November or December), he will not receive a benefit for that month. Beginning in 2015, only the annual limit will apply to him.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.