Social Security and the income penalty

December 24, 2024 7:31 AM

I am debating whether to file for benefits next year. I understand the income penalty as it relates to benefits, as I would potentially be filing before my full age of 67. But I can't seem to find the answer to this question.

Last year, 2023, I had taxable self-employed income. All good there. But in 2024 and moving forward my income won't be "earnings" as defined by SS. It will only be capital gains, royalties, interest etc., at least that is how it looks now.
My question is how far back does the SS look for the initial filing for benefits? Meaning, if I file next year would 2023 be included in their calculations? Or if I waited until say 2026 to file, would 2023 still be included?
Again, this only pertains to initial filing. I realize SS looks at income every year if someone is receiving benefits before full retirement age.

posted by jtexman1 to Work & Money (7 answers total)

This pdf called "How work affects your benefits" on the ssa.gov website explains what does and does not count as income as well as what happens your first full year of retirement. Capital gains don't seem to count. Wages and pension contributions do. It does not mention royalties specifically. It also explains when income counts for what year, if you work for wages, they count for the year you worked and not for the year in which you were paid. If you're self employed, it counts for the year in which you got paid.

This page does mention royalties. It says they are not counted under the earnings test: "Royalties received in or after the year a person turns FRA. The royalties must flow from property created by the person's own personal efforts that he or she copyrighted or patented before the taxable year in which he or she turned FRA; Note: These royalties are excluded from gross income from self-employment only for purposes of the earnings test."
That bolding is mine.
posted by soelo at 8:07 AM on December 24

I think your 2023 earnings would be used to calculate your benefit whenever you retire, if they’re within your top 35 years of indexed earnings. Is that what you’re asking? I’m going by this. The first example shows earnings from 2024 being counted in a 2025 retirement benefit calculation because they are among that worker’s top 35 years.
posted by daisyace at 8:35 AM on December 24

Response by poster: I know they calculate 35 years of earnings for benefits. And I know that royalties, interest, etc is not counted as earnings when someone takes benefits. I was trying to find out what years are used in calculating any benefit penalty as relates to "earnings" income when someone takes benefits prior to full retirement age. In other words, do they look back one year, two, three? I know too the income penalty drops off at full retirement age which for me is 67.

I will have to try to contact SS directly it seems. I can't find the answer to this anywhere. Many thanks though.
posted by jtexman1 at 8:44 AM on December 24

There is no look back period for the income penalty: "We adjust the amount of your Social Security benefits in 2024 based on what you told us you would earn in 2024. If you think your earnings for 2024 will be different from what you originally told us, let us know right away. "
posted by soelo at 9:15 AM on December 24

what years are used in calculating any benefit penalty as relates to "earnings" income when someone takes benefits prior to full retirement age


Oh! Yeah, pretty certain there’s no look-back period. Benefit reductions only result from earnings in that same year.
posted by daisyace at 9:19 AM on December 24

With the caveat that this is all pre-Trump2, as someone who took benefits earlier than my FRA, I can tell you that there are no "penalties" for earnings in years prior to you receiving benefits. That is, they do not reduce your payment based on earnings accrued before you begin receiving benefits.

When you do begin to receive benefits, if you are working, you can report to them your anticipated annual earnings at the beginning of the year if they will be above the ~22k that are allowed before deductions are taken. This allows them to annualize your payments for the year, which practically speaking has meant they withhold payments for the months that would cause an overage. If I anticipate earning 44k for the year and my SSA benefit is 24k (example figures only), I can deduct the first ~22k (changes each year) and then I will be deducted $1 for every $2 of earnings. Effectively this means that my 24k benefit will be reduced by 11k, and the remainder will be paid out to me NOT MONTHLY, but whenever that 11k would have been reached. In this case, if my monthly check would have been 2k, it will take ~5.5 months to reach 11k, and I would not receive my first check of the year until June. They try to optimize for no overpayments as it costs each of us (me and the gov't) money to deal with overpayments. There is a way to report earnings monthly via their website, but it has never functioned properly for me due to when I receive my paychecks.

An added bonus to working after you collect benefits prior to FRA is that it can increase your monthly benefit amount if it overrides a prior low-earning year. I still have a few under 10k earning years in my base 35 due to life, and each year I work and earn more than 10k, they recalculate the base 35, which means some increase in my monthly check.
posted by drossdragon at 9:20 AM on December 24

I will have to try to contact SS directly it seems.

Yes. You are definitely in "don't take advice from strangers on the internet" territory.

I've found the SSA very helpful in explaining how scenarios would play out.
posted by Tell Me No Lies at 6:17 PM on December 24