What Income Counts Towards Social Security Earnings Limit?
Key Takeaway:
- Various types of income count towards Social Security earnings limit, including wages, salaries, self-employment income, bonuses, commissions, vacation pay, severance pay, income from investments, and rental properties.
- However, there are also sources of income that do not count towards the limit, such as retirement income, IRAs and pensions, capital gains and dividends, workers’ compensation and disability benefits, and some government benefits.
- To maximize your Social Security benefits, you can consider delaying retirement, reducing or avoiding earning limits, limiting wages during early retirement years, adjusting IRA and pension withdrawals, and coordinating with a spouse’s benefits.
Are you concerned about Social Security earnings limit? Don’t worry. In this blog, you will learn how to calculate and understand what income counts towards the annual Social Security earning limit.
What income counts towards Social Security earnings limit?
When calculating Social Security benefits, it is important to understand what types of income are included in the earnings limit. Wages, salaries, and self-employment income all count towards the limit, while investment income, pensions, and annuities do not. It is important to keep track of all taxable income to ensure accurate reporting. Additionally, Social Security benefits may be reduced if the earnings limit is exceeded. According to the Social Security Administration, as of 2021, the earnings limit is $18,960 per year.
It is crucial to remember that the earnings limit is applied differently depending on a recipient’s age. For those under full retirement age, one dollar of benefits will be withheld for every two dollars earned above the earnings limit. In the year the recipient reaches full retirement age, the limit is raised to $50,520, and one dollar of benefits will be withheld for every three dollars earned above the limit. Once a person reaches full retirement age, there is no longer an earnings limit.
As reported by AARP, Social Security benefits have been reduced for more than 50 percent of people ages 50 and older who received benefits and worked at the same time. It is important to carefully monitor income and understand the earnings limit to avoid any unexpected reductions in benefits.
Image credits: retiregenz.com by Adam Jones
Types of income that count towards the limit
Social security benefits have an earnings limit, limiting your total income before benefits are reduced. The following types of earnings count towards the limit:
- Wages from jobs
- Self-employment income
- Tips
- Commissions
- Taxable fringe benefits
- Other taxable income
It is important to note that certain forms of income do not count towards this limit. For example, payouts from traditional 401(k) plans, pensions, and investment income do not count.
Unique details to keep in mind include the fact that the earnings limit changes each year and that social security beneficiaries who have already reached full retirement age are not subject to any earnings limit.
In true history, this earnings limit was established in response to a growing concern about the financial stability of the social security program. By reducing the amount of benefits paid out to those who earn above a certain threshold, the program is able to better manage its financial obligations and continue providing support to those who need it most.
Image credits: retiregenz.com by David Jones
Types of income that do not count towards the limit
Incomes that are exempt from Social Security earnings limit:
Income sources that are not counted towards the Social Security earnings limit are crucial to understand. Here are six types of income that are exempt from the limit:
- Income from investments like stocks, dividends, or bond interest income
- Gifts, inheritances, or life insurance proceeds or compensation for certain injuries
- Housing and other allowances paid for members of the military, as well as tax-exempt interest income
- Income earned after reaching full retirement age
- Income earned from foreign sources, including pensions
- Certain types of income received by Native Americans regarding the Indian Mineral Resources Act payments or judgments from Indian Claims Commission cases
It’s important to remember that Social Security counts only earned income towards the earnings limit, and not investment income or other unearned income. It may also be useful to note that the threshold limit may change each year, revealing the necessity of staying updated.
For instance, Robert, who is 66 years old and retired, started his construction business at the age of 62. In the same year, Robert earned $45,000, exceeding the earnings limit of $17,640, but because he exceeded it only by entering retirement age, he received benefits of $1 for every $3 over the limit.
Image credits: retiregenz.com by Yuval Jones
Strategies to maximize Social Security benefits
Having a solid plan in place can help you maximize your Social Security benefits. Here are some strategies to consider:
- Delaying your benefits until age 70 can increase your monthly payment amount.
- Spousal benefits can be claimed as early as age 62, or as late as your full retirement age.
- If you are divorced, you may still be able to claim spousal benefits based on your former spouse’s record.
- If you have a high earning history, consider delaying your benefits while you continue to earn to increase your average indexed monthly earnings (AIME).
- Working in retirement can also boost your AIME, which can increase your monthly benefit.
- Claiming survivor benefits can be a smart move for widows or widowers to maximize their benefits.
It’s important to note that each individual’s situation is unique, so it’s crucial to speak with a financial advisor to develop a customized plan. By strategizing and maximizing your Social Security benefits, you can ensure a more secure financial future.
According to the Social Security Administration, “Social Security is the largest source of income for most elderly Americans.”
Image credits: retiregenz.com by Adam Arnold
Five Facts About What Income Counts Towards Social Security Earnings Limit:
- ✅ For 2021, the Social Security earnings limit is $18,960. (Source: Social Security Administration)
- ✅ If you are under full retirement age for the entire year, $1 in benefits will be deducted for every $2 in earnings above the earnings limit. (Source: Social Security Administration)
- ✅ The earnings limit applies only to earned income, such as wages, salaries, and bonuses. (Source: AARP)
- ✅ Investment income, such as dividends and capital gains, does not count towards the Social Security earnings limit. (Source: The Balance)
- ✅ If you reach full retirement age in 2021, there is no earnings limit. (Source: Social Security Administration)
FAQs about What Income Counts Towards Social Security Earnings Limit?
What income counts towards social security earnings limit?
The income that counts towards the social security earnings limit includes wages, salaries, bonuses, commissions, and net earnings from self-employment.
Does investment income count towards social security earnings limit?
No, investment income such as interest, dividends, and capital gains do not count towards the social security earnings limit.
Is social security disability income included in the earnings limit?
No, social security disability income is not included in the earnings limit as it is not earned income.
What is the current social security earnings limit for 2021?
The social security earnings limit for 2021 is $18,960 per year for individuals who have not yet reached full retirement age.
What happens if I earn above the social security earnings limit?
If you earn above the social security earnings limit, your benefits will be reduced by $1 for every $2 earned above the limit.
Do all social security recipients have an earnings limit?
No, only individuals who have not yet reached full retirement age have an earnings limit. Once you reach full retirement age, you can earn as much as you want without any reduction in your social security benefits.
