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For a retiree, every dollar counts. This is especially true when it comes to Social Security retirement benefits, as this income source is guaranteed for life.
Unfortunately, there are ways you could end up inadvertently losing some of the money the Social Security Administration is supposed to send you. Many people aren’t even aware of three possible reasons some of their payments could disappear. Here’s what they are.
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1. If you work while collecting benefits
For many seniors collecting retirement benefits, it comes as a huge surprise that taking a job in retirement could cause them to lose some or even all of their Social Security.
This is an issue only for a subset of seniors — those who claimed benefits before their full retirement age (FRA). FRA is between 66 and 67 depending on your birth year, but benefits can be claimed years earlier — as early as 62.
For those who start benefits ahead of FRA but who also continue to hold down a job, Social Security payments are temporarily forfeited once earnings exceed a certain threshold. Specifically, $1 in benefits is forfeited for every $2 earned above $19,560 if you work in 2022 but won’t reach full retirement age at any time during the course of this year. And $1 is forfeited for every $3 earned above $51,960 if you will hit FRA sometime during the year but haven’t yet.
Although these thresholds increase over time, the fact that benefits disappear with high earnings doesn’t change. And the Social Security Administration withholds entire checks to account for the forfeited income, which means you could go months — or even the whole year — without a retirement check.
Eventually, your benefits are recalculated at FRA, and you end up with more money each month if you miss out on payments. But if you built your budget around getting both a paycheck and Social Security, you’re going to be out of luck.
2. If you owe federal tax on benefits
You could also end up losing some of your retirement benefits if you owe federal taxes on them, which can come as a huge surprise if you assume these earned benefits won’t be subject to taxes.
Unfortunately, a growing number of retirees each year are going to end up losing part of their retirement income to the IRS, as the thresholds at which benefits become taxable aren’t indexed to inflation and have remained the same since the 1980s — even as wages and incomes among seniors have grown.
Part of your benefits becomes taxable once your provisional income hits $25,000 for single filers and $32,000 for married joint filers. Provisional income equals half your Social Security income, along with all taxable and some non-taxable income as well. Depending on how much you earn, up to 85% of your benefits could be taxable. This is a huge financial hit if it comes as a surprise.
3. If you owe state tax on benefits
State taxes could also end up causing part of your benefits to disappear if you live in one of the 13 states that impose local tax on Social Security benefits under at least some circumstances.
These states include:
Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
North Dakota
Rhode Island
Utah
Vermont
West Virginia
Not everyone in these locations will necessarily owe taxes, but it’s important to learn the rules — especially if you’re a higher earner and more likely to be subject to taxation.
Between federal and state tax, along with the impact of working, you could end up with hundreds or even thousands of dollars less in Social Security money than anticipated. You need to be prepared for this reality before retiring so you’ll have a realistic idea of what your retirement benefits will actually do for you.
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