Advanced Underwriting Consultants

Question of the Day – March 8

Ask the Experts!

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

Question: My client intends to take an early retirement benefit from Social Security.  How much can the client earn before the retirement benefit begins to be reduced?

Answer: If earnings are too high during a calendar year before an early retiree reaches full retirement age, the benefit for that year may be reduced.  Starting with the month a retiree reaches full retirement age (66 for those retiring in 2011), the retiree can earn as much as possible without having a reduction in benefits.

Earnings include wages and net earnings from self-employment. Earnings do not include pensions, annuities or investment income.

In general, an early retiree who earns too much will have social security retirement benefits reduced by $1 for every $2 of excess earnings in a calendar year.  The calculation of how much is too much depends on

  • Whether social security benefits were paid for the whole calendar year, and
  • Whether the taxpayer has reached full retirement age in a given year.

If an early retiree has not yet reached full retirement age for a calendar year AND has received early retirement benefits for the whole year, the amount of earnings exemption in 2011 is $14,160.  The retiree can earn up to that amount and keep early retirement social security benefits intact.  If the early retiree has earnings in 2011 that exceed the exemption amount by $10,000, then social security benefits are reduced by $5,000 for the year.

If it is the first year of early retirement benefits, and if the benefits are started in a month other than January, the earnings test will apply on a monthly basis for the first year of benefits. For example, a retiree could begin receiving benefits in July after earning $30,000 during the first six months of the year, and nothing thereafter. Benefits would not be reduced, even though total earnings for the year are over the 2011 limit.

If a retiree has earnings for calendar months after receiving first year benefits, the exemption is pro-rated for the months benefits are received.  For example, if benefits begin in July, pre-July earnings are not counted.  However, earnings beginning in July may not exceed $1,180/month.  If earnings exceed the threshold by, say, $5,000, those excess earnings would reduce benefits by $2,500 for 2009.

If the early retiree reaches the calendar year in which the taxpayer’s normal retirement date occurs, two things happen in the retiree’s favor.  First, the earnings exemption amount is increased in the year of full retirement age to $37,680 in 2011.  Second, for any amount earned in excess of the exemption amount, the reduction in benefits is $1 for every $3 of earned income.

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