SHOW NOTES: 2020-10-01 MiM

Last Week’s Question of the Week: How many consumers in the United States were victims of Identity Theft in 2019? Was it 3 million or 14 million people?

ANSWER: Over 14 million people.

HOST: Your subject today revolves around the taxation of Social Security. I think many people are a little surprised when they find out that their benefit is taxed?

KLAAS FINANCIAL: Yes, many people new to receiving Social Security are surprised to find out that a portion of the money they receive from Social Security may be treated as taxable income, which means they’ll have to pay income taxes on it each year. This is especially common among those who continue working while receiving retirement benefits, as their earned income can take them above the income threshold at which the IRS starts taxing Social Security benefits.

A look at the numbers:

  • Over 64 million people (1 in every 6 U.S. residents) collected Social Security benefits in June of 2020.
  • Social Security benefits were not always taxable. When Social Security was created in 1935, and it began paying out monthly benefits in 1940, the Treasury Department issued specific tax rulings that made it clear that Social Security benefits were excluded at that time from federal income taxation. Due to legislation enacted in 1983, Social Security Trust Funds formally began to have Social Security recipients begin to pay taxes on a percentage of their Social Security benefits received above a certain income threshold.
  • Currently, almost 20 million people pay income taxes every year on a percentage of their Social Security retirement or disability benefits, and that number could, if the current laws governing benefit taxation remain, go unchanged. Note: SSI (Supplemental Social Security Income) is not taxed.
  • Social Security has the unique characteristic of getting its funding from both employee and employer contributions. Workers aren’t taxed on the money their employers pay in payroll taxes, so when retirees get their benefit payments, the portion that came from their employers’ tax payments should, arguably, be fully taxed as it wasn’t previously included in the worker’s income.

HOST: So, who is taxed on their Social Security, and how can I calculate this today?

KLAAS FINANCIAL: If your only income is from Social Security, your benefits likely aren’t taxable. But if you have other taxable income — such as from a job, freelancing, a pension or withdrawals from tax-deferred retirement savings — then 50% or 85% of your Social Security benefits may be subject to federal income taxes.

To determine the percentage, first calculate your “provisional income,” which is your adjusted gross income (not counting Social Security benefits), plus any nontaxable interest and then add in half of your Social Security benefits.

If you are single:
With income less than $25,000, your benefits are not taxable.
With income between $25,000 and $34,000, then 50% of your Social Security benefits may be taxable.
With income more than $34,000, then 85% of your benefits may be taxable.

If you are married:
With income of $32,000 or less, your Social Security benefits are not taxable.
With income between $32,000 to $44,000 on a joint return, then up to 50% of your Social Security benefits may be taxable.
With income of $44,000 or more on a joint return, 85% of your benefits may be taxable.

Example: If you file individually, have $50,000 in income and get $1,500 a month from Social Security, you would pay taxes on 85% of your $18,000 in annual benefits, or $15,300. Nobody pays taxes on more than 85% of their Social Security benefits, no matter their income.
Keep in mind: These calculations only apply to federal income taxes. Additionally, 13 states tax Social Security benefits.

HOST: I know one of the questions everyone wonders is when is the best time to start their benefit? When is it?

KLAAS FINANCIAL: That depends on your overall financial situation. Some of the questions you need to explore are: What type of debt do you have going into retirement? What are your income needs? Do you have a spouse who will also be collecting Social Security?

You need to understand what your “Full Retirement Age” or “normal retirement age” is. This is the age at which a person may first become entitled to full or unreduced retirement benefits from Social Security. Remember you may start receiving benefits as early as age 62 or as late as age 70. Born before 1954, FRA is 66; born between 1955-1959 it is 66 + some months; born after 1960, it is 67 years old.

If you are working, how much will you be earning? Perhaps it is worth waiting to collect. Remember, there is a limit to your income if you collect Social Security prior to your FRA which we will explain in a moment.

Understand that you could receive Delayed Retirement Credits of 8% up to age 70. If your full retirement age is 67, then your benefit could increase by 24% if you wait till age 70 to begin collecting. There are no delayed retirement credits added on past age 70.

HOST: If I take my Social Security early, prior to Full Retirement Age, what restrictions do I have to watch out for?

KLAAS FINANCIAL: The Social Security administration may reduce your benefits between the ages of 62 and full retirement age (66-67) if your total earned income is over $18,240 in 2020. Be careful of this! After that, $1 will be deducted from your payment for every $2 that exceeds the limit. However, in the year you reach full retirement age, your benefits will be reduced by $1 for every $3 you earn above $48,600 (for 2020).

There is no limit on earnings for workers who are “full” retirement age or older for the entire year. Also, if you have earned your own Social Security benefit, then you are entitled to all of your own Social Security benefit or 50% of your spouse’s (whichever is greater) in retirement. Be aware of age differences, etc.

HOST: How can I get a Social Security statement that shows a record of my earnings and an estimate of my future benefits? And how soon should I apply for benefits?

KLAAS FINANCIAL: Go to to set up your own personal Social Security statement account. Also, check for accuracy of income reporting. You should apply for retirement benefits three months before you want your payments to start. The easiest and most convenient way to apply for retirement benefits is by using the online application at

HOST: Mary Jo from our Money in Motion Listener Corner asks: “How is my Social Security benefit calculated if I only worked 25 years?”

KLAAS FINANCIAL: Great question. Social Security benefits are based on your lifetime earnings. The formula is a little complicated but averages the income from your 35 highest-earning years.
If you stop work before you start receiving benefits and you have less than 35 years of earnings, your final benefit amount is affected. Social Security puts in a zero for each year without earnings and then calculates the amount of retirement benefits you will receive. Years with no earnings reduces your retirement benefit amount.

Even if you have 35 years of earnings when you stopped working, some of those years may be low-earning years. When you file for retirement benefits, those years are averaged into your calculation, creating a lower benefit.

If you have already accumulated 40 Social Security credits, you can use the Retirement Estimator at to get a rough estimate of what your benefit may look like.

This Week’s Question of the Week: How many people collected Social Security benefits in the United States as June 2020? 64 million or 100 million?