Social Security is one of America's most significant social programs, but there's no denying that it can be challenging to navigate sometimes. There are many rules, information that changes annually, and state-specific regulations that require retirees to remain up to date at all times.
Unfortunately, the wealth of information surrounding Social Security can sometimes lead to misinterpretation and the spread of myths. Neither of these is good, because knowing the truth from fiction is essential to making informed decisions. Here are three common myths you should be aware of and avoid believing.
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1. Social Security benefits are always tax-free
Like other forms of income, Social Security benefits could possibly be subjected to federal taxes. Whether this applies to you depends on your provisional income, which is your adjusted gross income (AGI) plus tax-free interest and half of your annual Social Security benefits.
Your AGI is your total annual earnings -- including sources like dividends, capital gains, and rental income -- minus deductions like student loan interest or traditional IRA contributions. Tax-free interest is interest not subject to federal income taxes, like Treasury bonds.
For example, if someone had an AGI of $80,000, $3,000 in tax-free interest, and $20,000 in annual Social Security benefits, their provisional income would be $93,000.
Here's how much of your Social Security benefit could be taxed federally based on your provisional income.
| Percentage of Taxable Benefits | Filing Single | Married, Filing Jointly |
|---|---|---|
|
0% |
Less than $25,000 |
Less than $32,000 |
|
Up to 50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
Up to 85% |
More than $34,000 |
More than $44,000 |
Data source: Social Security Administration.
It's essential to note that these are not the tax rates, just how much of your benefits are eligible to be taxed.
Someone single with a provisional income of $80,000 would never pay 85% of that in taxes. Instead, up to 85% of the $80,000 ($68,000) could possibly be added to their taxable income. They would then apply whatever tax rate they pay on income to determine how much extra they'd have to pay.
State tax rules for Social Security vary by state, so it's essential to check (and stay up to date on) your respective state's laws. As it stands, 38 states don't tax Social Security at all.
2. Higher earnings always equate to higher benefits
Social Security calculates your benefit by taking a percentage of your average income in the 35 years you earned the most. This typically means that the more you earn, the higher your benefit will be, because you've paid more in Social Security taxes over your career. However, a threshold (called the wage base limit) caps the amount of income subject to Social Security taxes each year.
For 2024, the wage base limit is $168,600, so no amount over that will be taxed for Social Security. It also means earning $168,601, $5 million, or $25 million in the year wouldn't increase your Social Security benefit any higher. Whatever it was when you were earning $168,600 is what it'll continue to be.
The wage base limit is adjusted for inflation each year, so there could be a chance that you cross the threshold in one year but not the next.
3. Working while receiving early benefits will cause you to lose money forever
It is true that if you claim Social Security benefits before your full retirement age, there's a limit on how much you can earn. For 2024, the most you can earn is $22,320 if you won't be reaching your full retirement age and $59,520 if you're in the months leading up to it.
Earning above those limits will reduce benefits by $1 for every $2 in earnings above it, or $1 for every $3 above it if you reach your full retirement age in the year. Luckily, this money isn't lost forever -- it's just withheld. The withheld amount will be gradually added back to your monthly benefits once you reach your full retirement age.
For example, let's assume your full retirement age is 67, and you claim benefits at 65 while earning above the limit. If Social Security reduces your annual benefit by $2,500, $5,000 would've been withheld in those two years leading up to your full retirement age. Once you turn 67, Social Security will recalculate your benefits in a way that gradually returns your $5,000 over time.
