A client recently received a 5-figure bill from Social Security requesting that he pay back all benefits paid to him last year within 30 days. Such a notice will make anyone apoplectic. Luckily, we were able to sort out the confusion and eliminate the client’s bill.
According to the Social Security administration, our client had violated the earnings test. If you are under full retirement age (66 – 67, depending on the year of your birth) your benefits are subject to an annual earnings test. For every $2 earned beyond $15,720, Social Security withholds $1 of benefits. In the year you reach full retirement age, the exempt amount increases to $41,880 and $1 is withheld for every $3 earned beyond the exemption.
Once you turn full retirement age, you are no longer subject to the earnings test. If some benefits are withheld due to the earnings test, your monthly benefit will increase at full retirement age to take into account those months in which benefits were withheld.
What if you retire mid-year and pre-retirement earnings exceed the limit?
Social Security has a special earnings test for the first year of retirement to account for this common fact pattern. Regardless of annual earnings, you can receive a full Social Security check for any month in which earnings are $1,310 ($3,490 if you reach full retirement age this year) or less. Note that if you are self-employed, there are other tests to determine if you are truly “retired.” The following year, the regular annual earnings test applies.
Our client had stopped working early in the year and received a severance payment that exceeded the annual limit several times over. He then started collecting Social Security benefits a few months later. While he was receiving Social Security benefits, his monthly income did not exceed the $1,310 limit. Under the regular annual earnings test, his benefits should have been withheld entirely. Under the monthly earnings test, all of his benefits were payable.
The Social Security Administration used the annual earnings test when it issued the notice to the client. They only knew his income for the year, not the timing of his earnings. Our client was able to visit the local Social Security office and provide the support necessary to show the timing of his earnings so that the Social Security Administration could apply the proper, monthly earnings test.
His final amount due: $0 - well worth the leg work.