Everyone must pay applicable Social Security taxes on income, even those who work past full retirement age. In addition, working past full retirement age can also increase your Social Security benefits in the future because you continue to contribute to Social Security through your payroll tax.

Income may temporarily reduce benefits

Continuing to work may actually reduce current benefits, if any, taken during the year full retirement age is reached, according to a Social Security Administration limit (which changes every year).

For example, if full retirement age is reached in July, the total benefit income earned from January through July must be below the limit, or Social Security benefits are reduced by $1 for every $3 of income above the limit. For 2024, that limit is $59,520, up from $56,520 in 2023.

Additionally, if you are at full retirement age for the entire year, $1 is deducted from your benefit payments for every $2 you earn over the annual limit. For 2024, that limit is $22,320.

The money deducted is held by the Social Security Administration and paid back gradually once the taxpayer stops working. There are no earnings limits after the month in which full retirement age is reached when the full benefit amount is paid, regardless of how much income is earned.

Taxation of benefits

Drawing Social Security benefits while continuing to work can have the unintended negative consequence of bumping a taxpayer into a higher tax bracket.

In addition, most people forget that a certain percentage of Social Security benefits can be taxed – up to 85% – depending on file status and combined income (which includes half of your Social Security benefits).

Some states also tax Social Security benefits. You may have taxes withheld from your Social Security benefit payments by filling out IRS Form W-4V or by claiming voluntary service Retention Online request form.

Starting in 2023, Social Security benefits for some recipients could be taxed at the state level in 12 states. If you live in one of these states — Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont or West Virginia — check with the state fiscal agency to find out more.

As with the federal tax, how these agencies tax Social Security varies based on income and other criteria.

How to reduce benefits taxes

There are several remedies available for these who are taxed on their social security benefits. Perhaps the most obvious solution is to reduce or eliminate the interest and dividends that are used in the IRS provisional income formula (which is the same as the Social Security Administration’s definition of combined income shown above).

Reduce or eliminate interest and dividends

Therefore, the solution could be to convert reportable investment income into deferred tax income, such as from an annuity, that will not appear on Form 1040 until it is withdrawn. If you have $200,000 in certificates of deposit (CDs) earning 3%, which translates to $6,000 a year, that will count as provisional income.

But that same $200,000 growing in an annuity, with the interest reinvested in the annuity, will effectively generate $0 reportable interest when calculating provisional income.

Generally, annuities become taxable income when taken as distributions depending on the type of account. Therefore, virtually any investor who does not spend all of the interest paid from a CD or other taxable instrument can benefit from moving at least a portion of their assets into an investment or tax-deferred account.

Work less, earn less

Another possible remedy is simply to work a little less, especially if you are at or close to the threshold of having your benefits taxed.

conclusion

If you continue to work after retirement age, you will continue to contribute to Social Security through payroll tax.

When you start receiving Social Security benefits, they may be taxed based on your combined income. You may be taxed at up to 50% or 85% of your benefits.

There are a lot of strategies to avoid taxation, two of which are reducing income from work and reducing income from interest and dividends.