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Your Income—It Can Affect Your Social Security Benefit

The second factor is the potential taxability of Social Security benefits. Under current law, individuals with higher levels of earned income may be taxed on 85% of their benefits. For example, if modified adjusted gross income (MAGI) for Social Security purposes (generally all income including tax-exempt interest plus one-half of Social Security benefits received) exceeds $44,000 for those who are married and filing jointly, then up to 85 percent of benefits are included in regular taxable income.

Relaxing the taxation of Social Security benefits has been discussed in Washington, but that issue has cooled somewhat in recent years, particularly as marginal rates initially dropped as a result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and then again with the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA). Nevertheless, the issue of taxation on Social Security benefits bears careful watching by those who may be impacted by further changes.

At least for the immediate future, when you add up the regular tax on earned income, the FICA tax on wages (or self-employment income), the potential "giveback" of benefits if you are under age 70 and still working, and exposing up to 85% of benefits to taxation, you may find that "paying for the privilege" of working may be a bit steep.

If you really need the extra income, you may have little choice. On the other hand, if you`re doing something you really enjoy, the tax costs may be a small price to pay for staying busy, being challenged, and feeling productive.