There are currently over 35 million Americans who are age 65 and older. The Social Security Administration (SSA) predicts that by the year 2030 this age group will make up 20% of the U.S. population. For many Americans, Social Security benefits make up an important part of their retirement planning. Nevertheless, a substantial number of people are unaware of how the Social Security system works. The following presents some basic information for SS retirement planning.

The age limit for Social Security eligibility is rising. A person born prior to 1938 will be eligible for full SS benefits, regardless of earnings, at age 65. However, beginning in 2003, the age at which one will be eligible to receive full benefits will start to increase from age 65 to age 67.

The rules for divorced persons are a little more complicated. Such a person may be eligible to receive SS benefits on the record of a former spouse who is either receiving benefits or is deceased, if: the person is age 62 (or age 60 if the former spouse is deceased); the person is not married; and the marriage lasted at least 10 years. The divorced person must also not be eligible for an increased personal benefit that exceeds one-half of the former spouse's unreduced benefits. Also, a divorced person who is disabled may be eligible for SS benefits at age 50.

Social Security benefits can be subject to reduction and/or taxation. For example, a worker who is age 65 or older has no earnings limit, but a worker under the age of 65 can only earn up to $10,680 per year before being subject to a loss of benefits (loss of $1 in benefits for every $2 earned).

Furthermore, a portion of one's Social Security benefits can be subject to federal taxation if the person enjoys significant additional income. The tax is determined by one's "provisional income," which is defined as total adjusted gross income, plus tax-exempt interest and one-half of SS benefits. Currently, there is no federal income taxation for a married couple filing jointly whose provisional income is not more than $32,000, or for a single person whose provisional income is not more than $25,000. The Social Security benefits are taxable up to a certain percentage, depending upon the amount of the provisional income.

For more information on SS benefits, and for planning for your retirement, talk with your accountant or tax advisor, or contact your local Social Security Administration office.

8/15/01

Source: CPA Client Tax Letter