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
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
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.
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
|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 in excess of the limit
Benefit reduction = 1/3 of the excess
|The earnings test
cost Ida $500 of her Social Security benefits
-- an entire monthly benefit ($417)
and part of a second monthly payment ($83).
Source: House Ways and Means Social Security
Capitol Hill consensus was that the Depression-era
earnings limit outlived its usefulness and legislators agreed unanimously
to eliminate it completely. Now retirees
can earn any amount and still receive all their Social Security
-- and tax -- tradeoffs
In passing the law changes, Congress exhibited an amazing show of
political amity. Why all the bipartisan legislative agreement on
The key reason is that Baby Boomers, a large
and politically active group, see their fast-approaching retirement
as a continuation of current lifestyles. Many want to keep working
and still get all the Social Security they've paid for through payroll
taxes. Many people perceive a retirement earnings test as a tax
on their labor, says Social Security Commissioner Kenneth Apfel.
Secondly, although scrapping the earnings limit
would cut into the federal treasury, proposal advocates say there
are factors that counter -- and eventually could reduce -- the initial
In testifying before the Ways and Means subcommittee,
Aldona Robbins of the Institute for Policy
Innovation pointed to the Texas think tank's study showing that
after 2000, the bill's cost would decline for two reasons:
- The increase in the earnings limit enacted
by Congress in 1996: Since these caps were going up anyway, there
would have been only a short-term budgetary hit by eliminating
the limit altogether.
- The delayed
retirement credit increases benefits for people who postpone
retirement past the normal age: Instituted in 1972, the credit
increases the Social Security benefit for every year a worker
postpones retiring until age 70. In 1983, Congress adjusted the
law further and now workers born in 1938 who delay retirement
will receive a 6.5 percent credit for each year they do not collect
benefits. The yearly credit will increase, reaching 8 percent
for those born in 1943 or later. For individuals who work a partial
year, the yearly percentage is broken into monthly increments.
The increase stops at age 70, regardless of when a worker starts
collecting benefits. This means more potential retirees are likely
to delay collecting benefits longer in order to get bigger checks
Finally, these new employees would once again
pay into the income tax system. And this is what seniors will have
to evaluate if they go back to work.
Retirees who receive only Social Security or railroad retirement
benefits are not taxed on those payments.
Other private retirement benefits also may be
tax-free, depending upon how the retirement plan is structured.
For example, if a plan included contributions a worker made after
paying taxes on contributed money, then that portion of the retirement
payout is not taxable. However, any earnings on the pension fund
or contributions the employer made or money a worker added to the
account before taxes were taken out is taxable.
The amount of retirement money that ultimately
is taxed is determined by adding retirement funds plus other income
-- whether it's earned at a job or from investments, including any
that comes from a spouse -- to see if it reaches a federally set
base amount threshold. When the threshold is met, generally 50 percent
and possibly 85 percent of a retiree's Social Security benefits
The base amount is reached by combining one-half
of a retiree's benefits and his or her other income. On 2002 returns,
some benefits may be taxable if the base amount is greater than:
- $25,000 for single, head of household, or
a qualifying widow or widower filers.
- $25,000 for married filing separately filers
who lived apart from a spouse for all of
the tax year.
- $32,000 for married filing jointly filers.
- $0 for married filing separately filers who
lived with a spouse at any time the tax year.
your benefits taxable?
This Internal Revenue Service worksheet is a quick way to
check whether some of your benefits may be taxable.
Write in the amount from box 5 of all
your Forms SSA-1099 and RRB-1099. Include the full amount
of any lump-sum benefit payments received in 1999, for
1999 and earlier years. (If you received more than one
form, combine the amounts from box 5 and write in the
If the amount on line A is zero or less, stop here;
none of your benefits are taxable this year.
of the amount on line A
||Add your taxable
pensions, wages, interest, dividends, and other taxable
income and write in the total.
||Write in any tax-exempt
interest (such as interest on municipal bonds) plus any
exclusions from income (listed below).
||Add lines B, C,
and D and write in the total
Exclusions to be added in line D:
Interest from qualified U.S. savings bonds,
Employer-provided adoption benefits,
Foreign earned income or foreign housing,
Income earned in American Samoa or Puerto
Rico by bona fide residents.
Compare the amount on line E to your base
amount for your filing status. If the amount on line E equals
or is less than the base amount for your filing status, none
of your benefits are taxable this year. If the amount on line
E is more than your base amount, some of your benefits may
Once the base amount meets the applicable taxable
level, then retirees have additional computations to determine how
much -- 50 to 85 percent -- of their retirement money is taxable.
Generally, higher total income means more of your retirement benefits
Figuring the precise taxable amount depends
upon individual filing factors. Worksheets and examples to help
retirees are found in Internal
Revenue Service Publication 915, Social Security and Equivalent
Railroad Retirement Benefits.
Is a post-retirement job worth the extra paperwork
and possible taxation of previously tax-free benefits? If you're
considering re-entering the workforce, be sure to do the math first.
-- Updated: Jan. 20, 2003