Social Security is one of the most import sources of income for seniors. Sixty percent of retirees say their monthly retirement benefits are a major source of income, according to the most recent edition of an annual Gallup poll. Another 28% said Social Security played at least a minor role in their budget.
As such, it's important to make sure you keep as much of those monthly checks as possible. Unfortunately, there are many ways you could see a drop in your benefits if you don't know the rules. Here are three ways you could lose some of your Social Security benefits that might surprise you.
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1. Taxes
Only 48% of respondents to a recent Nationwide Financial survey knew that Social Security benefits are not tax free. You may be able to avoid paying taxes on your Social Security income, but you need to know the rules.
Social Security taxation is based on a metric called combined income. Combined income is equal to the sum of your adjusted gross income , nontaxable interest income, and half your Social Security benefits. If your combined income exceeds a certain threshold, a portion of your benefits become taxable income. You'll owe regular income tax on the amount.
The following table shows the percentage of your benefits taxable at certain thresholds.
| Taxable portion of Social Security Benefit | Individual Combined Income | Married Filing Jointly Combined Income |
|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |
Data source: Social Security Administration.
You can stay below those thresholds if you're mindful of how retirement account withdrawals and capital gains will impact your adjusted gross income. Even then, it's becoming more and more difficult to keep your Social Security income tax free.
What's more, there are nine states that still tax Social Security income . If you live in one of those states, be sure you understand the state tax code.
2. Working while collecting Social Security
Just 54% of respondents in the Nationwide Financial survey knew that some of your benefits could be withheld if you're collecting benefits and still working. The rule only applies to beneficiaries before they reach their full retirement age , but the retirement earnings test could end up reducing your benefit.
The retirement earnings test says that if you earn more than $22,320 in wages during 2024, the government will reduce your monthly benefit by $1 for every $2 above that limit. There's an exception for those reaching full retirement age in the current year, raising the limit to $59,520. The reduction is just $1 for every $3 above that limit.
Importantly, the government isn't just taking that money it's withholding and keeping it for itself. The Social Security Administration will adjust your payment once you reach full retirement age to make up for the withheld amount. The adjustment is based on how many months' worth of benefits were withheld due to the earnings test. The new benefit at full retirement age is then based on what your benefit would have been if you delayed your Social Security application that many months.
You can continue working after reaching full retirement age without any reduction in benefits.
3. Your spouse stops receiving Social Security benefits
If you're collecting spousal benefits , you may be surprised by a lower benefits check if your spouse decides to suspend benefits. One important stipulation of spousal benefits is that the spouse whose earnings record you're collecting on must also receive Social Security for you to be eligible.
You can withdraw a Social Security application within 12 months of originally applying. You have to pay back everything you received, but it effectively erases the application. You may also suspend your benefits after reaching your full retirement age, which allows you to accrue delayed retirement credits and increase your benefit.
If your spouse decides to withdraw their application or suspend benefits, it would force you to take Social Security based on your own earnings record. If you were previously collecting spousal benefits, that amount will be lower, possibly $0, depending on your work history.
Planning around Social Security with a spouse is already complex. While it might make sense for an individual to withdraw or suspend their benefits, it's important to consider the dynamics of the entire household's income in any decision.
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