Q. If I delay filing for Social Security until age 66, can I receive the benefit and continue to work? I’d like to draw Social Security benefits yet keep working until age 75. What are the tax implications of my strategy? —Steven
A. First off, you can always continue to work and draw Social Security benefits. Benefits are reduced temporarily if your outside income exceeds certain levels. But these reductions do not apply for benefits received at age 66 or later, which will be the case with you.
If you work and collect benefits, however, your increased income may push you into a higher tax bracket, which may mean your Social Security income may be taxed. If you haven’t already done so, go online to my Social Security and create an account. You will then be able to see your projected benefits at age 66.
To make an accurate estimate of your federal income taxes, keep in mind that not all of your Social Security income is taxable at the federal level. Social Security uses a measure it calls “combined income” to determine how much of your benefit is taxable, and it’s not intuitively obvious. So work through the numbers carefully—you may need to refer to your most recent tax return to make the calculation.
To determine your combined income, take your adjusted gross income (from your tax return), add any non-taxable interest income you’ve received in the past year, and then add half of your Social Security benefit.
If the total is less than $25,000 ($32,000 on joint tax returns), you will pay no income taxes on your Social Security benefits. If the total is between $25,000 and $34,000 ($32,000 to $44,000 on joint returns), you may have to pay taxes on half your Social Security benefits. People with higher combined incomes may have to pay taxes on 85% of their Social Security benefits, which is the maximum rate.
You also should consider if you can afford to live just on your salary and defer your own Social Security benefits until age 70. This will have two positive impacts:
First, delayed retirement credits will increase your monthly Social Security payments by 8% a year (plus annual inflation adjustments). If you defer for four years, your benefits will rise by 32% compared with their level at age 66.
Second, your tax rate likely will be reduced if you’re only receiving wage income from age 66 to 70. When you do stop working and rely more heavily on Social Security payments, your reduced income may translate into lower taxes on your Social Security benefits as well as a lower overall federal tax rate.
Lastly, if you are single and plan to stay so, you should consider filing and suspending your Social Security benefit at age 66. By doing so, you will have the option of going back to Social Security anytime before age 70 and requesting a lump-sum payment for all the benefits that were suspended. That could come in handy if you face an emergency cash crunch. But there’s a downside: if you request a lump-sum payment, Social Security will erase all your delayed retirement credits. Your lump sum will be valued as if you took benefits at 66, and this also will be the level of your regular monthly benefit going forward.
Even the best of plans could change if you run into financial or health problems, so preserving the right to get a lump-sum payment is a good idea for single persons. For someone who is or has been married, however, spousal benefits can be knocked for a loop if you file and suspend, so think twice about using this option.
Philip Moeller is an expert on retirement, aging, and health. His book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” will be published in February by Simon & Schuster. Reach him at [email protected] or @PhilMoeller on Twitter.