How Working Can Make Your Social Security Benefits Taxable
So, you’ve reached your full retirement age, and the earnings limit is a thing of the past. Congratulations! You can earn as much as you like without any benefit reductions from the Social Security Administration. However, there’s another government agency to consider: the Internal Revenue Service (IRS).
Your earnings from a part-time job can affect whether or not you have to pay federal income tax on a portion of your Social Security benefits. This is a completely separate issue from the earnings limit we just discussed. The key here isn’t just how much you earn from work, but how much “total” income you have from all sources.
The IRS uses a special formula to figure this out. They calculate something called your “provisional income” (sometimes also called “combined income”).
The formula is simple:
Provisional Income = Your Adjusted Gross Income (AGI) + Nontaxable Interest + One-Half of Your Social Security Benefits for the year.
Let’s break that down. Your Adjusted Gross Income (AGI) is basically all your taxable income added together (like wages from a job, pension payments, and IRA withdrawals) minus certain specific deductions. Nontaxable interest usually comes from municipal bonds. Then, you add just half of your annual Social Security benefits to that total. The final number is your provisional income.
This number is then compared to a set of thresholds established by the IRS rules to determine how are Social Security benefits taxed.
The Income Thresholds That Trigger Taxes
The IRS has two sets of thresholds, one for individuals and another for married couples filing a joint tax return. Keep in mind that “taxable” doesn’t mean you pay that percentage in tax; it means that percentage of your benefits is added to your total taxable income for the year, and then taxed at your normal rate.
For an Individual (like a single, head of household, or qualifying widow/er):
- If your provisional income is below $25,000, your Social Security benefits are generally not taxable.
- If your provisional income is between $25,000 and $34,000, up to 50% of your Social Security benefits may be subject to income tax.
- If your provisional income is over $34,000, up to 85% of your Social Security benefits may be subject to income tax.
For a Married Couple Filing Jointly:
- If your provisional income is below $32,000, your Social Security benefits are generally not taxable.
- If your provisional income is between $32,000 and $44,000, up to 50% of your Social Security benefits may be subject to income tax.
- If your provisional income is over $44,000, up to 85% of your Social Security benefits may be subject to income tax.
Let’s walk through an example. Meet Tom and Linda, a married couple who file their taxes jointly.
Tom receives $20,000 a year from Social Security.
Linda receives $15,000 a year from Social Security.
Their total Social Security benefit is $35,000.
Tom works a part-time job as a consultant and earns $30,000 for the year.
They have no other income.
First, we calculate their provisional income:
1. Their AGI is Tom’s job earnings: $30,000.
2. Half of their Social Security benefits is $17,500 ($35,000 / 2).
3. Their provisional income is $30,000 + $17,500 = $47,500.
Because their $47,500 provisional income is above the $44,000 threshold for married couples, up to 85% of their Social Security benefits will be included in their taxable income for the year. This doesn’t mean they lose that money; it just means it’s counted when figuring out their overall tax bill. Without Tom’s part-time job, their provisional income would have only been $17,500, well below the threshold, and their benefits would not have been taxed.
This is why understanding your complete financial picture is so important. A part-time job is a fantastic way to supplement your income, but you need to be aware of how it interacts with all your other resources to avoid a surprise bill during tax season. This is a core part of planning for your retirement taxes.
