Understanding Income Limits for Social Security Benefits and Earned Income

When advising your client, it’s important to clarify what types of income are considered when determining whether they will have to pay back some of their Social Security benefits due to exceeding the income limit. Here’s how the different sources of income your client receives are treated:

1. Income Included in the Annual Earnings Test:

   • Earned Income: The key figure for the Social Security earnings limit is earned income, which includes wages from employment or net earnings from self-employment. In your client’s case, the $20,000 earned from part-time work is the only amount that counts toward the annual earnings test for 2023. The earnings limit for 2023 is $21,240, so as long as the part-time income does not exceed this threshold, your client will not be penalized by having to pay back Social Security benefits.
   • Excess Earnings: If your client’s earned income exceeds the earnings limit, Social Security will withhold $1 in benefits for every $2 earned over the limit. Since your client’s part-time income is $20,000, which is below the limit, there is no impact from this income alone.

2. Income Excluded from the Annual Earnings Test:

   • Military Pension and Disability: The $2,000 from the military pension, the $152/month in military disability benefits, and the $480/month pension from another company are not considered earned income. Therefore, these amounts are excluded from the Social Security earnings test and will not affect your client’s benefits.
   • Retirement Account Withdrawals: Similarly, withdrawals from retirement accounts, such as the $35,000 your client plans to take out, are not considered earned income and do not count toward the earnings test. However, it’s important to note that these withdrawals could impact the taxability of your client’s Social Security benefits, potentially increasing the amount of benefits that are taxable.

3. Considerations for Managing Social Security Benefits:

   • Tax Implications: While the military pension, disability, other pensions, and retirement account withdrawals don’t impact the Social Security earnings test, they can affect the taxability of your client’s Social Security benefits. If your client’s combined income (which includes adjusted gross income, non-taxable interest, and half of Social Security benefits) exceeds certain thresholds, a portion of their Social Security benefits may be taxable.
   • Strategies to Minimize Impact: To minimize the impact on taxability, your client might consider spreading out the retirement account withdrawals over multiple years or exploring other tax-efficient withdrawal strategies. However, this will not affect the Social Security earnings limit, as only earned income is considered.

In summary, your client’s part-time work is the only income that impacts the Social Security earnings test. As long as this income stays below the 2023 limit of $21,240, they won’t have to pay back any Social Security benefits. The other sources of income, including pensions and retirement account withdrawals, do not count toward the earnings limit but could influence the taxability of Social Security benefits. Let me know if you need further clarification or additional assistance!