Understanding Social Security: 6 Important Rules
When to file for Social Security is one of the most important decisions you will ever make. Understanding these 6 rules is vital.
Deeming rules apply to a spouse who files for Social Security benefits before reaching their full retirement age. When they do so, they are deemed to have filed not only for ½ of the primary wage earners benefits, but also to have filed for their own Social Security retirement benefits. The applicant is in effect filing for two benefits but will only collect the higher of the two.
For example, if the applicant files at 62 and their retirement benefit is less than ½ of the primary wage earner’s (i. e. the person with the higher benefit), then they will receive spousal benefits. When they reach their full retirement age, there is no option to file for full retirement benefits on their own earning record because they have already been deemed to have filed for retirement benefits at the time that they filed for spousal benefits.
And the benefits that they took early at age 62 will be reduced.
Understanding how deeming works is an important ingredient for planning your Social Security strategy.
- Reduced Benefits for Early Retirement
If you file for retirement benefits before reaching your full retirement age, they will be reduced by up to 30% depending on the year of your birth. Likewise, spousal benefits (i.e. those filed by a spouse on the earnings record of the primary wage earner) will also be reduced. The earliest that you can file for Social Security retirement benefits is age 62 and 1 month because you must be 62 for the entire first month of eligibility.
To read about my filing strategy, checkout Early Social Security Benefits?
- File and Suspend
If you have reached your full retirement age, but are not 70, then you can file for Social Security retirement benefits and voluntarily suspend receiving them.
The reason that you would do this is to enable a spouse, who has also reached full retirement age, to file for spousal benefits on your earnings record. Deeming does not apply as long as the spouse has reached full retirement age.
This strategy allows the younger person to collect unreduced spousal benefits while both wage earners’ accrue Delayed Retirement Credits (DRC) thereby maximizing their Social Security benefits.
- Earnings Limit
If you are receiving reduced Social Security benefits (because you filed before your full retirement age), you can currently earn up to $15,720 with no reduction to your benefits. Your Social Security benefits will be reduced by $1 for every $2 that you earn over the annual limit.
For the year in which you reach your full retirement age, your benefits will be reduced by $1 for every $3 that you earn above $41,880.
Starting with the month that you reach your full retirement age, there is no earnings limit.
The taxation of Social Security benefits began in 1984. At that time up to 50% of one’s benefits could be taxed if income thresholds were exceeded ($25,000 for an individual and $32,000 for a married couple). In 1993 secondary thresholds were established that allowed up to 85% of one’s Social Security benefits to be taxable. These thresholds were set at $34,000 for an individual and $44,000 for a married couple.
These same thresholds still apply today. They have not been adjusted for inflation.
As for state taxes on Social Security, click here to see which states do so.
- Delayed Retirement Credits
For each month that you delay the start of your Social Security retirement benefits, Social Security will increase your benefits by 2/3 of 1% or by 8% per year (If you delay your benefits until age 70, they will be increased by 132%). Our filing strategy includes using DRCs as a way to offset the effect of forgoing earned income due to early retirement. Since Social Security uses the highest 35 years of earnings to calculate your benefit, each year of foregone earned income is replaced by an earlier (and most likely) lower earnings year. This yields a lower primary insurance amount. However, if you can hold out for DRCs, they make up the difference (and then some) for a lower overall earnings record.
DRCs also affect the amount of your spouse’s survivor benefits. Your spouse will receive your full Social Security benefit, adjusted for any DRCs, at the time of the primary wage earners death.
The actual increase in your benefit check is not reflected until January of the year following the year in which you start receiving your benefits.
Note: the information contained in this article is not offered as advice or guidance. It’s purpose is illustrative – not instructive or prescriptive. As always, consider seeking professional advice when it comes to your financial decisions.