Navigating Social Security While Working: Essential Insights for Gap Employees

65 is the new 55 when it comes to retirement from your Gap firm, meaning you may have the option to work at the same time you claim Social Security benefits. If you retire from Gap and get a part-time job or some consulting income, your paycheck can affect the amount you receive monthly, the amount you owe in taxes for the year, and your Medicare premiums.

Reasons abound to keep working, but for most, it simply comes down to math and to emotions.

With a longer lifespan on average, many of our clients from Gap are concerned they won't have enough savings to last their lifetime, and understandably so.

If you plan to keep working after retiring from your Gap while collecting Social Security, here is what you need to keep in mind:

If you start your Social Security benefits before your (FRA), or full retirement age (which is between 66 and 67, depending on the year you were born), you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your full retirement age(FRA). ¹

There will also be an earnings test until you reach that full retirement age(FRA): If you have earned income in excess of $19,560 in 2022, your benefits will be reduced by $1 for every $2 of earned income over the limit.

The year you reach your full retirement age(FRA), the earnings test limit is $51,960 in 2022, and your benefits will be reduced by $1 for every $3 of earned income over the limit.

These reduced benefits do not just 'disappear'. If your benefits have been reduced due to earnings, your monthly Social Security check will be increased after your full retirement age(FRA) to account for benefits withheld earlier due to excess earnings.

Note: Earned Income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of 'unearned' income.

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'Earned  Income' includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they're all based upon employment.  Once you reach your full retirement age(FRA), there is no earnings test and no benefit reductions based on earned income.

Tax Impacts

Separate from the earnings test, Social Security benefits themselves are subject to federal income taxes above certain levels of 'combined income.' Combined income generally consists of your adjusted gross income (AGI), ²  nontaxable interest, and one-half of your Social Security benefits.

• For individual filers with combined income below $25,000, none of your Social Security is taxed. For joint filers with combined income below $32,000, none of your Social Security is taxed. (See:  Income Taxes And Your Social Security Benefit   for more information.)
• For individual filers with combined income of $25,000 to $34,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.
• For joint filers with combined incomes of $32,000 to $44,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $44,000, then up to 85% of your Social Security benefits could be taxed.

Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation.

Additionally, 11 states also tax your Social Security benefits. The rules and exemptions vary widely across this group so it is wise to research the rules for your state or consult with a tax professional if you're one of our Gap clients that this applies. ³

State Social Security Tax

The eleven states below impose a tax on Social Security benefits to varying degrees.

Colorado 

Colorado's pension-subtraction system exempts up to $24,000 in pension and annuity income, including some Social Security benefits. The  exemption  is based on your age, starting at age 55.

Connecticut 

Connecticut partially or fully exempts Social Security benefits, based on a person's filing status and income.  

Kansas 

Kansas exempts Social Security benefits from state tax, based on the taxpayer's income. Your Social Security benefits are exempt from Kansas income tax if your federal adjusted gross income (AGI) is $75,000 or less, regardless of your filing status.

Minnesota 

Minnesota partially taxes Social Security benefits. The state allows a subtraction from benefits ranging from $2,725 for married taxpayers who file separately, to $4,260 for single taxpayers, to $5,450 for married taxpayers who file jointly. The rule is subject to phaseouts starting at incomes of $82,770 for joint married filers, $41,385  for married taxpayers filing separately, and $64,670 for heads of household and single filers. The subtraction is less for these incomes and eventually phases out entirely as you earn more. 

Missouri 

Missouri exempts Social Security benefits from state tax, provided that the individual is age 62 or older and has  adjusted gross income  of less than $100,000 if married and filing jointly, or $85,000 for all other filing statuses. Those who earn more than that might qualify for the exemption if they're disabled. 

Montana 

Montana asks residents to use the Montana Individual Income Tax Return to determine the portion of Social Security benefits that's taxable by the state (page 5 and page 6). That might be different from the federal amount. 

Nebraska 

Starting in 2022, Nebraska began phasing out taxation of social security benefits. The state allows a deduction for Social Security income that's included in your federal adjusted gross income if your federal Adjusted Gross Income(AGI) is less than or equal to $61,760 for married couples filing jointly, or $45,790 for all other filers. 

New Mexico

Starting in 2022, the state of New Mexico changed rules that would exempt most seniors from paying tax on social security benefits. This exemption is available to taxpayers with the following income thresholds — $100,000 for single filers, $150,000 for married filers filing jointly, and $75,000 for married filers filing separately. 

Rhode Island 

Rhode Island has an exemption on Social Security taxation for those who have reached  full retirement age  as defined by the IRS. Eligible taxpayers must have federal Adjusted Gross Income(AGI)s of $88,950 if single, or $111,200 if married and filing jointly. 

Utah 

In late 2019, Utah adopted a sweeping tax bill that includes a  tax credit  for Social Security benefits that are included in a taxpayer's federal adjusted gross income. The Adjusted Gross Income(AGI) thresholds are $25,000 for married filing separately, $50,000 for married filing jointly, and $30,000 for single filers. 

Vermont 

Vermont previously followed the federal rules for determining the taxable portion of Social Security benefits, and then it adopted exemptions for taxpayers with incomes below $25,000 for single filers and $32,000 for other statuses. Benefits for those with higher incomes are taxed at incremental levels, with no exemption available for Adjusted Gross Income(AGI) of over $55,000 if single or over $70,000 if you're married and file jointly.

Medicare & Social Security

In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. There is no age limit on these withholdings, nor any exemption for any sort of Social Security benefits status.

These earnings can also count toward the calculation of your benefits. The Social Security Administration checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.

If you are making much less in retirement than before, could it hurt your benefits?

No. This is because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.

Note: Your earnings may not only push you into a higher tax bracket, but also into a higher threshold for your Medicare premiums once you are over 65. Medicare sets the cost (premium) for Part B each year at a fixed rate for most participants ($170.10 a month for 2022), but it increases for individuals with an annual income over $91,000 and married couples with an annual income above $182,000. The cost for these higher-earning participants can range from $238.10 to $578.30 per month in 2022.

If your income is above a certain level, you may have to pay IRMAA (Income-Related Monthly Adjusted Amount) in addition to your Part B or Part D premium. We recommend you consult with a tax professional for more details on whether or not you are affected.

Can I Contribute to a Retirement Account?

Another key advantage of ongoing earned income even after you collect Social Security is that you can keep contributing to your retirement savings accounts like traditional IRAs, health savings accounts (HSAs), Roth IRAs, and 401(k)s.

Note:  If you are over 72, you will have to take the  required minimum distribution (RMD)  from your traditional IRA, except for during the 2020 pause because of COVID-19.

Your traditional 401(k), or similar Gap retirement plan, is a different story. In general, you can continue stashing away money in your current Gap-provided plan as long as you're still working, even part-time, and you can delay taking your RMD until after you retire.

These additional savings can help, especially if your savings are running a bit behind your goals. The combination of the added savings, tax-deferred growth potential, and the ability to defer tapping into your savings can be powerful, even at the end of your working career.