This is a commonly asked question, and while there is no single answer or strategy, we will explore the various options and avenues surrounding this important decision. It will not only affect your future Social Security benefit, but possibly the benefit protection for your survivors. General questions to consider include: Would it be better to take my benefits early and receive a smaller amount for a longer period or wait to receive a larger amount for a shorter period? What are my current cash needs? What is my current health/family longevity? Do I plan to work during retirement? Do I have other sources of income? Below are some areas to look at as you decide when to take Social Security, as well as maximize your benefit.
Determine Your Eligibility for a Social Security Benefit: According to the IRS, you need at least 10 years of work so you can earn a minimum of 40 credits (you can earn up to 4 credits per year) to qualify for Social Security retirement benefits. Your benefit amount is based on your highest 35 years of earnings. In 2024 you must earn $1,730 to get one Social Security credit and $6,920 to get the maximum of 4 credits.
Note that if you worked a job with a pension that didn’t have Social Security taxes taken out of your paycheck (i.e. public education system employees, railroad workers, and Federal government employees hired before 1984), your benefits will be reduced by a discounted factor based on how many years you worked in the field that didn’t withhold Social Security taxes.
Determine Your Full Retirement Age: Your full retirement age (FRA) is based on your birth date. If you were born in 1957 or earlier, you have reached full retirement age. For those born in 1958, your FRA is 66 and 8 months; for those born in 1959, the FRA is 66 and 10 months; and for those born 1960 or later the FRA is 67. If you are age 62 to 70, you should be receiving an annual statement from Social Security that lists your projected benefits in this age range.
Delay Taking Your Benefit Until Age 70: If you choose to wait until you are 70, you will typically earn a “delayed retirement credit” (DRC) for your own benefits (not your spouses). If you were born in 1943 or later, you will receive an 8% DRC. Note that the DRC will not be applied to your payment until the January after you begin receiving benefits.
Your Current Employment Status: If you are currently working and take your Social Security early, you will be subject to the Social Security earnings test for your annual income until you reach full retirement age. For example, in 2024, $1 in benefits will be deducted for every $2 you earn above the annual limit ($22,320 in 2024). Then in the year you reach your full retirement age, the reduction falls to $1 in benefits for every $3 you earn above a higher limit ($59,520 in 2024) until the month you reach full retirement age. This reduction in benefits is temporary because the Social Security Administration will recalculate your payments and credit back the deducted amount due to any excess earnings.
Your Marital Status: If you are married, you can consider claiming a “spousal benefit.” If your spouse was the higher earner, at full retirement age you can either take 100% of your own retirement benefit, or 50% of your spouse’s benefit, whichever is higher. If you take the spousal benefit before your full retirement age, your spousal benefit will be reduced. Note that the higher-earning spouse must apply for his or her own Social Security benefit first.
Also, if you were married for 10 years or more, and are now divorced, you can receive up to 50% of your ex-spouse’s full retirement benefit if you are still unmarried. The benefit will be reduced if you claim it between 62 and full retirement age. Also, your ex-spouse does not have to know you took the benefit, nor will it affect his/her benefit, or your ex’s new spouse. You also must be divorced for at least two years.
Tax Implications on Social Security Benefits: Your Social Security benefits will be subject to income tax depending on your combined income. Your combined income is equal to your adjusted gross income (AGI), plus tax-exempt interest and half of your Social Security benefits. (Please note that your modified adjusted gross income will include untaxed foreign income.) If your combined income is above a certain limit (IRS sets these limits), you will need to pay some tax. For 2023 and 2024, the limit is $25,000 for single filers and $32,000 for married, filing jointly. If your combined income is between $25,000 and $34,000 (single) and between $32,000 and $44,000 (married filing jointly), you will pay taxes on up to 50% of your Social Security income. If your combined income is more than $44,000, you can expect to pay taxes on up to 85% of your Social Security payments. Also, 40 states and the District of Columbia do not tax Social Security benefits, while 10 states do. Illinois does not tax Social Security or any other type of retirement income.
Things to consider:
1. If you choose to take your Social Security benefit (not your spouse’s) early, you will permanently reduce your payment by five-ninths of 1% for each month before your full retirement age. If you begin taking your benefit more than 36 months before your full retirement age, your payment decreases by five-twelfths of 1% for each month over 36 months.
2. Your payment will increase yearly with an annual cost of living adjustment (COLA), which is based on changes in a federal consumer price index. In 2024, beneficiaries received a 3.2% increase in their monthly Social Security benefits.
3. You can undo a Social Security benefit’s claiming decision during the first 12 months of claiming your benefits one time. You will have to repay any benefits you received, along with any spousal benefits. When you restart your benefits, you will receive a larger amount.
Conclusion: There are many factors that may affect the timing of claiming your benefits. Visit the Social Security website (www.ssa.gov) to find a calculator to help determine the amount of your benefit. Kakenmaster & Associates can assist you regarding how your Social Security benefit may affect your taxes.