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Older workers may earn more -- and pay more taxes

Thanks to the Senior Citizen's Freedom to Work Act of 2000, older workers now can earn more money without worrying about losing Social Security benefits.

Before the law was changed, senior employees who earned over a certain amount saw their federal retirement payouts reduced. That approach came under increasing fire as more and more seniors enjoy longer, active Golden Years. Many want -- or need -- to work beyond traditional retirement age.

But not all retirees should start updating their resumes.

While many will profit from bringing home a bigger paycheck to supplement retirement benefits, some seniors may find the tax ramifications not so appealing. Earning extra money might mean you will owe Uncle Sam for previously untaxed retirement benefits.

Depression-era program outdated
When Social Security was created in 1935, the earnings test was used to help move older workers out of the labor force so that younger ones, many with new or growing families, could fill scarce jobs.

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Before the passage of the senior earnings act, workers between 65 and 69 could earn no more than $17,000 or they would lose some Social Security payments. At that pay level, federal retirement benefits were reduced by $1 for every $3 that was earned over the cap. The earnings limit was increased yearly. When workers reached 70, the earnings cap disappeared.

How the Social Security earnings limit worked
Ida is 66 years old and receives $417 a month from Social Security (about $5,000 annually). Ida takes a part-time job as a cashier, earning $18,500. This is how the earnings test affected her:
Ida's earnings

$18,500

Earnings limit

$17,000

Ida's earnings in excess of the limit

$1,500