Dear Dr. Don,
I am 62 years old and work full time, making $62,000 a year. My girlfriend, who works at a CPA’s office, claims that I could file for Social Security benefits and only pay $2,000 extra in taxes per year.

Well, I just went down to the Social Security office to file, and they turned me away. They told me I was not eligible to file if I continued working full time at my rate and that I would not get a single check. Who’s right?
— Trude Tarry

Dear Trude,
That’s a tough one — choosing between trusting your girlfriend or the government.

Since you’ll wind up paying the government, listen to the Social Security office on this one. Here’s what the Social Security Web site has to say on the topic of taxes:

Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.

No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:

  • file a federal tax return as an “individual” and your combined income is
    • between $25,000 and $34,000, you may have to pay income tax on 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.
  • file a joint return and you and your spouse have a combined income that is
    • between $32,000 and $44,000, you may have to pay income tax on 50 percent of your benefits
    • more than $44,000, up to 85 percent of your benefits may be taxable.
  • are married and file a separate tax return you probably will pay taxes on your benefits.

IRS Publication 915, “Social Security and Equivalent Railroad Retirement Benefits,” explains the taxation in greater detail and gives you a worksheet to do a quick check on whether your benefits are taxable.

It gets worse. If you sign up for benefits before attaining full retirement age (for you, that’s age 66) and you are under the full retirement age for the whole year, Social Security deducts $1 in benefit for every $2 you earn above the annual limit. In 2009, that annual limit is $14,900.

You’re annual income of $62,000 puts you $47,100 over the limit, so Social Security would deduct $23,550 — which is more than you would have received in benefits.

There’s no point in signing up at age 62 if you have to give it all back — which is why the nice folks at your Social Security office turned you away.

The Social Security Web page “How Work Affects Your Benefits” explains all this in greater detail.