3 Ways to Lose Part of Your Social Security Benefits That Might Surprise Most Retirees

Social Security is one of the most important sources of income for seniors. Sixty percent of retirees say their monthly pension payments are their main source of income, according to the latest edition of Gallup’s annual poll. Another 28% said Social Security played at least a small role in their budget.

That’s why it’s important to save as much of those monthly checks as possible. Unfortunately, there are a number of ways you could see your benefits decrease if you don’t know the rules. Here are three ways you could lose some of your Social Security benefits that might surprise you.

1. Taxes

Only 48% of respondents to a recent Nationwide Financial survey knew that Social Security benefits are not tax-free. You can avoid paying taxes on your Social Security income, but you need to know the rules.

Social Security taxation is based on a measure called combined income. Your combined income is equal to the sum of your adjusted gross income, untaxed interest income, and half of your Social Security benefits. If your combined income exceeds a certain threshold, part of your benefits becomes taxable income. You’ll have to pay regular income tax on that amount.

The table below shows the percentage of benefits that are taxable once certain thresholds are exceeded.

Data source: Social Security Administration.

You can stay below these thresholds if you are aware of how retirement account withdrawals and capital gains will affect your adjusted gross income. Even then, it becomes increasingly difficult to keep your Social Security income tax-free.

In addition, nine states still tax Social Security income. If you live in one of those states, make sure you understand the state tax code.

2. Working while receiving social security benefits

Only 54% of respondents in the Nationwide Financial survey knew that some benefits could stop if you collect benefits and keep working. That rule only applies to beneficiaries before full retirement age, but the retirement earnings test could ultimately reduce your benefit.

The retirement earnings test says that if you earn more than $22,320 in 2024, the government will reduce your monthly benefit by $1 for every $2 above that limit. There is an exception for people who reach full retirement age this year, raising the limit to $59,520. The reduction is just $1 for every $3 above that limit.

Importantly, the government doesn’t take this money; it just keeps it and keeps it for itself. The Social Security Administration will adjust your payment when you reach full retirement age to make up for the amount that’s been withheld. The adjustment is based on the number of months of benefits that were withheld because of the earnings test. The new benefit at full retirement age is based on what your benefit would have been if you had delayed claiming Social Security that many months.

Once you reach full retirement age, you can continue working without any reduction in your benefits.

3. Your spouse stops receiving Social Security benefits

If you receive spousal benefits, you may be surprised by a lower benefit amount if your spouse decides to stop receiving benefits. One important condition of spousal benefits is that the spouse on whose behalf you receive benefits must also receive Social Security benefits for you to qualify.

You can withdraw your Social Security claim within 12 months of your original filing date. You must repay anything you received, but doing so effectively wipes your claim. You can also suspend your benefits after you reach full retirement age, which allows you to accumulate delayed retirement credits and increase your benefit.

If your spouse decides to withdraw their claim or suspend their benefits, you will be forced to collect Social Security benefits based on your earnings history. If you previously received spousal benefits, the amount will be lower, possibly $0, depending on your work history.

Planning for Social Security with a spouse is already complicated. While it may make sense for an individual to withdraw or suspend benefits, it’s important to consider the dynamics of the entire household’s income when making that decision.