The Social Security Earned
Income Limits

Individual Tax

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October, 2002
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Congress recently repealed (effective January 1 of 2000) what are called "earned income limits" on Social Security. Social Security recipients will no longer lose any of their benefits, no matter how much money they make from part-time or full-time work -- although they should be aware that their earnings could mean higher income taxes.

The legislation eliminates the $17,000 limit on earned income for Social Security recipients ages 65 to 69 -- there has been no limit on earned income for recipients age 70 and over. Previously, these recipients have lost $1 in benefits for every $3 they earned above that $17,000 ceiling.

Tax Planning

While this means working Social Security recipients will keep more of their benefits, many will find they need to think about tax planning.  With more money coming in, taxpayers might find their Social Security benefits are taxed at a higher rate.

The income threshold at which Social Security benefits begin to be taxed is $25,001 for single taxpayers, and $32,001 for married couples filing a joint return. At those amounts, up to 50 percent of benefits can be taxed. At $34,001 for single taxpayers and $44,001 for couples filing jointly, up to 85 percent of benefits can be taxed.

In computing how much of your benefits can be taxed, all kinds of income -- such as wages, interest income, Individual Retirement Account distributions, even tax-free income such as interest from municipal bonds -- must be included. You might not pay tax on some of that money itself, but it "is" thrown in for purposes of whether Social Security is taxable.

Working For Yourself

One possible way to lower your taxes is to structure your work so you can be classified as an independent contractor, working for yourself. If you can do that, you'll be able to claim deductions for job-related expenses that you would not be allowed to claim as someone else's employee.

Let's say you decide to work out of your home doing word processing for different clients. You set your own hours, and take on as much work as you want. You're not an employee of your clients, but an independent contractor, working at your own business.

Then, for example, if you decided to buy a more powerful computer with advanced software to get your work done, it would be deductible to the extent that you use it for business. If you drive your car to meet with clients or pick up supplies, your business-related mileage can also be deducted.

Even if you're working for someone in an office, you might still be considered an independent contractor under some circumstances. Of course, it's always wise to have a written agreement that you're working for someone part-time that clearly outlines that you're working on a project-by-project basis rather than under someone's dominion and control.  Please call our office if you have questions - there are a lot of gray areas in this part of the Tax Code and its best to know the rules well before venturing into unknown territory.

There also are ways to shelter investment income from taxes.  You may want to consider investing your additional income in Roth IRAs -- while there's no upfront tax deduction on these accounts, any gains you have over the remaining years of your life will be tax-free.


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This Information Is Not Intended For Use Without Professional Advice