Retirement is the light at the end of the tunnel for many people, and some can’t wait for those Social Security checks to start rolling in as soon as possible. There are many reasons to apply for social security as soon as it becomes available at age 62, but financially, it usually makes more sense to wait.
The concept of tax planning means that you sit down with a professional and plan the timing of your upcoming and future goals according to receiving the maximum tax benefit and minimum liability. It incorporates financial planning and legal guidelines to ensure that you are making the right decisions at the right time to protect your assets. Sometimes, a few months or a few years can mean the difference between thousands of dollars. One of the most important situations in which to start tax planning is when you start to think about retirement.
Once you decide to receive Social Security benefits, you may need to pay taxes on those benefits at the end of the year. You will receive a SSA-1099 which will report your benefits. Filing status and income help to determine whether you can be taxed on your social security. According to the Internal Revenue Service, you may be taxed for your Social Security Benefits if you received any other income besides your Social Security income. However, there are credits available that will assist you should you need to file a return. If you are 65, you can qualify for the elderly or disabled tax credit. This reduces your tax bill if you owe taxes to the Internal Revenue Service.
If you file as married filing separately, and live with your spouse for at least part of the year, then your benefits apply to your gross income. Part of your social security income is included in gross income even if you file under a different status.
If you live solely on Social Security, your income is zero, and you do not report the Social Security benefits. In this case, you do not need to file a federal return. If your spouse receives income, you will need to combine the income for the total, but at that time your income limit is $23,000.00 if your spouse is 65 or older, so if your income is less than this, you do not need to file a return. If your spouse is under 65, this amount decreases.
If your income plus half of your social security exceeds a certain amount determined by the IRS based on your filing status, then you will need to pay taxes on your income. If you are unmarried and at least 65 years old, you will file a tax return if your income is $11,850.00 or more.
Full retirement age is 66 years, but you can start collecting Social Security benefits at age 62. Social Security will typically only replace about 40% of your working income. Claiming Social Security at 62 reduces your benefits by 25% compared to the amount you would receive if you claimed at your "full retirement age". Those who wait until age 70 will receive a benefit that is 76% higher than the benefit received at age 62. However, there are some reasons you may wish to apply for Social Security right away.
If you lose your job, or have your hours reduced, you may wish to have Social Security available. If you have big shoes to fill at your company, your employer may bring someone in to learn the ropes before you are fully retired. In this case, without making the same amount of money you were accustomed to, Social Security benefits may look appealing. Also, those who become sick with a serious illness may wish to retire early.
Claiming Social Security benefits at age 62 also may make sense if you’ve had children later in life. Once you are over 62, your child can collect up to 50% of your Social Security benefit if they’re under eighteen and single, a full time student at eighteen or nineteen, or eighteen or older and disabled. Your spouse might also be entitled to a benefit until your child reaches sixteen. The maximum family benefit ranges from 150%-180% of your monthly payment, and is based on the number of family members who qualify. So, in this situation, if you are 62 with a 55 year old spouse and your dependent child is 13, you will receive a smaller personal benefit, but your spouse and child will receive up to 150% additional benefits based on your benefit.
If you still enjoy working, the general recommendation by most professionals is to wait to receive Social Security benefits. Waiting as long as possible to collect Social Security does increase the benefit you receive. It can usually mean about 8% more in your Social Security checks for each year you wait.
Setting up an additional retirement plan, like an IRA, gives you some flexibility, because it balances any missing income if planned properly. You can use your social security checks as extra income for a period of time, or delay your payments longer if you are cutting down your hours and still contributing to the system to increase your payments. If you continue working, but with less hours, and withdraw from your IRA, you can supplement your missing income and continue contributing to your Social Security benefits at the same time, therefore increasing the amount you would receive when you start collecting.
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