Tuesday, March 27, 2007

Must Social Security beneficiaries file estimate of annual earnings in advance?

When someone retires before reaching full retirement age, but at age 62 or later, and has to comply with the Social Security Annual Earnings Test, the question comes up whether the individual must report his estimated or expected earnings for the coming year.

Social Security normally gets last year’s earnings from an beneficiary’s Federal income tax return, and will update its Master File (presumably mainframe and not publicly accessible) computer record for the beneficiary sometime shortly after April 15 of any year. If one has exceeded the Earning’s Limit, Social Security will usually demand an overpayment refund. (There can be some exceptions.) Most of the time the earnings are determined from the “wages, tips” etc. line on the Form 1040, but the recipient is responsible for counting other special items that might fall under the test (such as royalties, sometimes). Self-employment can result in special considerations (if it generates more than $400 in income), as can some income reported as “Other”. Generally, as covered before, pensions, IRA distributions, and similar sources (interest, capital gains) do not count (their wages were counted when the earnings were deferred) and usually this is pretty clear from the individual items on the 1040. A few of the rules for special situations may be complicated or obscure and might require attention from an attorney or financial planner.

If someone is receiving benefits before full retirement age and suddenly takes a job that will markedly increase his or her earnings, he does need to call or contact Social Security, which may postpone or adjust benefits. What is if there is no change or only modest earnings, well under the AEL?

SSA lays out the rules at this link: "How Work Affects Your Benefits.” This file at one point reads: “We adjust the amount of your Social Security benefits in 2007 based on what you told us you would earn this year.” It doesn’t seem to say earlier in this document that the individual would have filed an estimate unless his or her earnings increased, or this is the first year (often the “grace year” where the Annual Earnings Test applies monthly). It would seem, to me anyway, that this probably means you must report to them if your earnings increase substantially and are likely to exceed the limit.

Tomkiel’s book, (review here) where he discusses the situation on p 208, would seem to bear this conclusion out. He says that SSA gets the information from your “W-2” or “self-employment tax return,” effectively any records that SSA gets from the IRS (your return). On p 210 he states that the deadline for filing a report if your IRS information is somehow incomplete or misleading is April 15, the same day you must file your income taxes. Otherwise, it appears that SSA will get the information from the IRS. There are penalties for failing to report income increases if they would result in overpayment of benefits.

Of course, any beneficiary with a complicated situation should consult with an attorney, tax advisor or financial planner. I am simply reporting here the best information that I can find.

The SSA POMS reference appears to be this file.

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