22 Social Security facts you (and your clients) should know

The original Social Security Act provided only retirement benefits for wage and salary earners. In 1939, benefits were added for family members after the worker’s death or retirement. Most amendments have expanded the scope of the Social Security program — by extending coverage to more groups of persons, by increasing benefits or by increasing the wage base for taxes and benefits.

Today, the largest and most common programs under the Social Security Act and its amendments are: (i) Federal Old-Age (Retirement), Survivors and Disability Insurance (OASDI), (ii) Temporary Assistance for Needy Families (TANF), (iii) Health Insurance for Aged and Disabled (Medicare), (iv) Grants to States for Medical Assistance Programs for low income citizens (Medicaid), (v) State Children’s Health Insurance Program for low income citizens (SCHIP) and (vi) Supplemental Security Income (SSI).

The rules regarding Social Security are complex and change frequently. Important topics for 2016 include the ability of same-sex couples to receive benefits, the impact of federal government gridlock on benefits received and changes imposed by the 2015 Bipartisan Budget Act.

Given this complexity, clients approaching retirement are bound to have questions about when to claim benefits, how benefits are taxed and how their individual claiming strategy should fit into their overall financial plan. Read on for answers to many of these questions. If you have questions that aren’t answered here, let us know in the comments section below.

1. Who is covered by Social Security?

Most workers are covered by Social Security and if they work long enough will be entitled to retirement benefits and/or disability.

However, certain individuals are not covered by Social Security. Individuals who started working for the federal government before 1984 are not covered by Social Security, except those who elected to transfer into the system during a 1987 transition period. Those who are not covered by Social Security are instead covered under the Civil Service Retirement System.

Also, certain individuals who work in the railroad industry are not covered by Social Security. Instead, these workers are covered under the Railroad Retirement System, which is governed by the Railroad Retirement Act.

Finally, there are other special circumstances where an individual would not be covered by Social Security. These include certain farm workers, workers of a family business, or domestic workers.

2. In general, who can receive Social Security benefits and what do the phrases “Normal Retirement Age” (NRA) and “Full Retirement Age” (FRA) mean?

Who Can Receive Social Security Benefits

• A disabled insured worker under age sixty-five.

• A retired insured worker at age sixty-two or over.

• The spouse of a retired or disabled worker entitled to benefits who:

• is age sixty-two or over; OR

• has in care a child under age sixteen (or over age sixteen and disabled), who is entitled to benefits on the worker’s Social Security record.

• The divorced spouse of a retired or disabled worker entitled to benefits if age sixty-two or over and married to the worker for at least ten years.

• The divorced spouse of a fully insured worker who has not yet filed a claim for benefits if both are age sixty-two or over, were married for at least ten years, and have been finally divorced for at least two continuous years.

• The dependent, unmarried child of a retired or disabled worker entitled to benefits, or of a deceased insured worker if the child is:

• under age eighteen, OR

• under age nineteen and a full-time elementary or secondary school student, OR

• aged eighteen or over but under a disability that began before age twenty-two.

• The surviving spouse (including a surviving divorced spouse) of a deceased insured worker if the widow(er) is age sixty or over.

• The disabled surviving spouse (including a surviving divorced spouse in some cases) of a deceased insured worker, if the widow(er) is age fifty to fifty-nine and becomes disabled within a specified period.

• The surviving spouse (including a surviving divorced spouse) of a deceased insured worker, regardless of age, if caring for an entitled child of the deceased who is either under age sixteen or disabled before age twenty-two.

• The dependent parents of a deceased insured worker at age sixty-two or over.

In addition to monthly survivor benefits, a lump-sum death payment is payable upon the death of an insured worker.

Normal Retirement Age and Full Retirement Age

For many years Normal Retirement Age (NRA) meant the age when someone was eligible for benefits that were not reduced for taking early benefits (see Q 182 and Q 205). But recently this phrase has come to mean, among planners and the general public, the age when many people “normally” apply for benefits, which is when they are generally first eligible — at age sixty-two.

As a result of this shift in language, a new phrase has developed among planners and the public to describe the age when unreduced benefits may be received — Full Retirement Age (FRA). As may seem obvious, FRA refers to the age at which a person qualifies for full Social Security benefits. This age is now determined by a person’s year of birth and for those born in 1960 and later is now age sixty-seven. This shift in terms has started to affect guidance put out by the Social Security Administration (SSA), although the SSA still uses both phrases to describe when unreduced benefits may be taken.

For the 2016 edition of Social Security & Medicare Facts the phrase “Normal Retirement Age” is used in the place of the phrase “Full Retirement Age” to describe the age at which unreduced benefits may be taken.

3. When will same-sex couples be eligible to receive spousal Social Security benefits?

On June 26, 2015, the United States Supreme Court issued a decision in Obergefell v. Hodges, holding that same-sex couples have a constitutional right to marry in all states. As a direct result of this decision, it is clear that more same-sex couples will be recognized as being married for the purposes of determining their entitlement to Social Security benefits and as well as Supplemental Security Income (SSI) payments.

This has been a changing area of law. In June 2013, the Supreme Court ruling in United States v. Windsor, established that same sex couples who were married in a jurisdiction where same-sex marriages are recognized were eligible for spousal benefits, such as the spousal survivor benefit, the spousal retirement benefit, and the lump sum death benefit. At that time, the Social Security Administration reviewed its own policies regarding same-sex marriage after the Supreme Court decision, and concluded that same-sex couples who are legally married in one state remain married for federal tax purposes even if they reside in a state that does not recognize their marriage. In addition, the SSA is now recognizing same-sex marriages that took place outside of the United States.

The Social Security Administration recommends that someone who is the spouse, divorced spouse, or surviving spouse or a same-sex marriage or other legal same-sex relationship to immediately apply for benefits. Immediate applying will preserve the filing date, which can affect benefits. Social Security is now processing some retirement, surviving spouse and lump-sum death payment claims for same-sex couples in non-marital legal relationships and paying benefits where they are due. In addition, the Social Security Administration considers same-sex marriage when determining SSI eligibility and benefit amounts.

4. What federal agency administers the Social Security or OASDI program?

The Social Security Administration. The central office is located in Baltimore, Maryland. The administrative offices and computer operations are housed at this location.

The Social Security Administration is an independent agency in the executive branch of the federal government. It is required to administer the retirement, survivors, and disability program under the Social Security and the Supplemental Security Income (SSI) programs. The commissioner of the Social Security Administration is appointed by the President and approved by the Senate and serves a term of six years.

In recent years, the Social Security has increasingly provided it services through its website at www.ssa.gov. Many of the services that were traditionally carried out through local Social Security offices or through the mail can now be done online. These services allow a person to apply for benefits, get a Social Security Statement, appeal a decision, find out about qualifying for benefits, estimate future benefits, and do other activities related to the management of benefits.

Alternatively, the local Social Security office is the place where a person can apply for a Social Security number, check on an earnings record, apply for Social Security benefits, black lung benefits, SSI, and Hospital Insurance (Medicare Part A) protection, enroll in Medical Insurance (Medicare Part B), receive assistance in applying for food stamps, and get full information about individual and family rights and obligations under the law. Also, a person can call the Social Security Administration’s toll-free telephone number, 1-800-772-1213, to receive these services. This toll-free telephone number is available from 7:00 a.m. to 7:00 p.m. any business day. From a touch-tone phone, recorded information and services are available twenty-four hours a day, including weekends and holidays. People who are deaf or hard of hearing may call 1-800-325-0778 between 7:00 a.m. and 7:00 p.m. Monday through Friday.

Regular visits to outlying areas are made by the Social Security office staff to serve people who live at a distance from the city or town in which the office is located. These visits that are made to locations are called contact stations. A schedule of these visits may be obtained from the nearest Social Security office.

Social Security Administration regional offices are located in Atlanta, Boston, Chicago, Dallas, Denver, Kansas City, New York, Philadelphia, San Francisco, and Seattle. Approximately 1,400 Social Security offices throughout the United States, Puerto Rico, the Virgin Islands, Guam, and American Samoa deal directly with the public. Each region also has a number of teleservice centers located primarily in metropolitan areas. These offices handle telephone inquiries and refer callers appropriately. To find a local office, visit the Social Security Administration website at //www.ssa.gov/agency/contact/.

The Office of Hearings and Appeals administers the nationwide hearings and appeals program for the Social Security Administration. Administrative law judges, located in or traveling to major cities throughout the United States, hold hearings and issue decisions when a claimant or organization has appealed a determination affecting rights to benefits or participation in programs under the Social Security Act. The Appeals Council, located in Falls Church, Virginia, may review hearing decisions.

The Office of Central Records Operations maintains records of an individual’s earnings and prepares benefit computations.

5. How can a person check on his Social Security earnings record and receive an estimate of future Social Security benefits?

The Social Security Statement containing both an estimate of benefits and a record of earnings is available either online or by the mail. To access the statement online, a person must create a my Social Security account at www.ssa.gov/myaccount/. This account also allows a person to manage personal information such as changing an address or the way in which a direct deposit is received.

To receive the statement by mail, a person should fill out Form SSA-7004 (Request for Social Security Statement). The form is available at the Social Security Administrations website at www.ssa.gov, at any Social Security office, or by calling the Social Security Administration’s toll-free number, 1-800-772-1213. A statement of total wages and self-employment income credited to the earnings record and an estimate of current Social Security disability and survivor benefits and future Social Security retirement benefits will be mailed to the individual.

If all earnings have not been credited, the individual should contact a Social Security office and ask how to correct the records. The time limit for correcting an earnings record is set by law. An earnings record can be corrected at any time up to three years, three months, and fifteen days after the year in which the wages were paid or the self-employment income was derived. “Year” means calendar year for wages and taxable year for self-employment income. An individual’s earnings record can be corrected after this time limit for a number of reasons, including to correct an entry established through fraud; to correct a mechanical, clerical, or other obvious error; or to correct errors in crediting earnings to the wrong person or to the wrong period.

The Social Security Administration must provide individuals, age twenty-five or older, who have a Social Security number and have wages or net self-employment income, with a Social Security account statement upon request. These statements must show: (1) the individual’s earnings, (2) an estimate of the individual’s contributions to the Social Security program (including a separate estimate for Medicare Part A Hospital Insurance), and (3) an estimate of the individual’s current disability and survivor benefits and also future benefits at retirement (including spouse and other family member benefits) and a description of Medicare benefits.

Earnings and benefit estimates statements are automatically mailed on an annual basis to all persons age twenty-five or over who are not yet receiving benefits.

This earnings and benefit estimates statements contain the following information:

(1) The individual’s Social Security taxed earnings as shown by Social Security Administration records as of the date selected to receive a statement.

(2) An estimate of the Social Security and Medicare Part A Hospital Insurance taxes paid on the individual’s earnings.

(3) The number of credits (i.e., quarters of coverage, not exceeding forty) that the individual has for both Social Security and Medicare Hospital Insurance purposes, and the number the individual needs to be eligible for Social Security benefits and also for Medicare Hospital Insurance coverage.

(4) A statement as to whether the individual meets the credit (quarters of coverage) requirements for each type of Social Security benefit, and also whether the individual is eligible for Medicare Hospital Insurance coverage.

(5) Estimates of the monthly retirement, disability, dependents’ and survivors’ insurance benefits potentially payable on the individual’s record if he meets the credits (quarters of coverage) requirements. If the individual is age fifty or older, the estimates will include the retirement insurance benefits he could receive at age sixty-two (or his current age if he is already over age sixty-two), at full retirement age (currently age sixty-six to sixty-seven, depending on year of birth) or at the individual’s current age if he is already over full retirement age, and at age seventy. If the individual is under age fifty, the Social Security Administration may provide a general description, rather than estimates, of the benefits that are available upon retirement.

(6) A description of the coverage provided under the Medicare program.

(7) A reminder of the right to request a correction in an earnings record.

(8) A remark that an annually updated statement is available upon request.

6. What will happen to Social Security benefit payments when the Trust Fund becomes insolvent?

Social Security and disability benefits are financed through the payroll tax. In 2015, the revenue collected by this tax went to pay out benefits that were due. The payroll tax was insufficient to pay out all benefits, so the balance was made up by interest payments due on government bonds held in the Social Security trust funds.

In 2015, the trust funds that help finance both Social Security and disability benefits were projected to run out in 2033, according to the intermediate assumptions of the Office of the Chief Actuary in the Social Security Administration.

If nothing is done to reform Social Security, then it is projected that starting sometime in 2033, beneficiaries will receive only 77 percent of the benefits currently projected as being payable. In other words, the projected payroll tax revenues will be sufficient to pay only 77 percent of the projected benefits.

7. If a husband and wife are both receiving monthly benefits, do they receive one or two monthly payments?

If a husband and wife have both worked, they will each be paid their own Social Security benefit by direct deposit to their designated bank account.

However, monthly benefits payable to a husband and wife who are entitled on the same Social Security record and are living at the same address are usually combined in one payment.

8. Are Social Security benefits subject to federal taxes?

Up to one-half of the Social Security benefits received by taxpayers whose incomes exceed certain base amounts are subject to income taxation. The base amounts are $32,000 for married taxpayers filing jointly, $25,000 for unmarried taxpayers, and zero for married taxpayers filing separately who did not live apart for the entire taxable year.

There is an additional tier of taxation based upon a base amount of $44,000 for married taxpayers filing jointly, $34,000 for unmarried taxpayers, and zero for married taxpayers filing separately who did not live apart for the entire taxable year.The maximum percentage of Social Security benefits subject to income tax increases to 85 percent under this second tier of taxation. (The rules listed in the paragraph above continue to apply to taxpayers not meeting these thresholds.)

After the end of the year, Form SSA-1099 (Social Security Benefit Statement)is sent to each beneficiary showing the amount of benefits received. A worksheet (IRS Notice 703)is enclosed for figuring whether any portion of the Social Security benefits received is subject to income tax.

9. In general, how is the PIA computed under the “wage indexing” method?

It is based on “indexed” earnings over a fixed number of years after 1950. (Indexing is a mechanism for expressing prior years’ earnings in terms of their current dollar value.) Previous computations used actual earnings and a PIA Table. The “wage indexing” method uses a formula to determine the PIA.

Step I. Index the earnings record

Step II. Determine the Average Indexed Monthly Earnings (AIME)

Step III. Apply the PIA formula to the AIME

10. Who should use the “wage indexing” benefit computation method?

The “wage indexing” method applies where first eligibility begins after 1978. First eligibility is the earliest of:

(1) the year of death,

(2) the year disability begins, or

(3) the year the insured becomes sixty-two.

However, if the worker was entitled to a disability benefit before 1979, and that benefit terminated more than twelve months before death, another disability, or age sixty-two, the new method will be used in determining the PIA for the subsequent entitlement.

11. What earnings are used in computing a person’s Average Indexed Monthly Earnings (AIME)?

The AIME is based on Social Security earnings for years after 1950. This includes wages earned as an employee and/or self-employment income.

Only earnings credited to the person’s Social Security account can be used and the maximum earnings creditable for specific years are as follows:

$118,500 for 2016	$51,300 for 1990
$118,500 for 2015	$48,000 for 1989
$117,000 for 2014	$45,000 for 1988
$113,700 for 2013	$43,800 for 1987
$110,100 for 2012	$42,000 for 1986
$106,800 for 2009-2011	$39,600 for 1985
$102,000 for 2008	$37,800 for 1984
$97,500 for 2007	$35,700 for 1983
$94,200 for 2006	$32,400 for 1982
$90,000 for 2005	$29,700 for 1981
$87,900 for 2004	$25,900 for 1980
$87,000 for 2003	$22,900 for 1979
$84,900 for 2002	$17,700 for 1978
$80,400 for 2001	$16,500 for 1977
$76,200 for 2000	$15,300 for 1976
$72,600 for 1999	$14,100 for 1975
$68,400 for 1998	$13,200 for 1974
$65,400 for 1997	$10,800 for 1973
$62,700 for 1996	$9,000 for 1972
$61,200 for 1995	$7,800 for years 1968-1971
$60,600 for 1994	$6,600 for years 1966-1967
$57,600 for 1993	$4,800 for years 1959-1965
$55,500 for 1992	$4,200 for years 1955-1958
$53,400 for 1991	$3,600 for years 1951-1954

12. How are Average Indexed Monthly Earnings (AIME) computed for a self-employed individual whose self-employment came under Social Security after 1951?

The same formula and starting date (1951) are used as in the computation for employees. In many cases, this will mean that years of zero earnings must be used in the AIME contribution.

Example. Dr. Smith, a physician, came under Social Security in 1965. He applies for retirement benefits in 1995 when he reaches age sixty-two. Earnings and months in thirty-five years must be used in computing his AIME (forty elapsed years, 1955-1994, less five). Social Security earnings in his elapsed years are at the- maximum creditable amount in 1965-1994.

Although Dr. Smith has covered earnings in only thirty years before 1995, the total earnings for these thirty years must be divided by the number of months in thirty-five years (420). His AIME is computed by indexing his earnings from 1965-1992, adding actual earnings in 1993 and 1994 to total indexed earnings, and dividing by 420. Thus, his AIME is $3,127 ($1,313,559 ÷ 420).

Recomputation to include Dr. Smith’s earnings in 1995 (assuming they are at least $61,200) will give him an AIME of $3,273.

13. An individual is considering early retirement at age fifty-five. If she retires at fifty-five with NO earned income for the next seven years, how will this affect her benefits at age sixty-two?

Benefits are based on the highest thirty-five years of indexed earnings. The effect in this case is generally that the highest earning years are often the last years of employment, therefore benefits may not be as high as estimated by the Social Security Administration.

14. Do Social Security benefits increase by continuing to work and contributing to Social Security?

It depends. When benefits are computed, Social Security uses the highest thirty-five years of indexed earnings. If the current earnings exceed the lowest year used in the computation, the benefits will increase. If the current earnings are less, then there will be no change.

15. How are a beneficiary’s benefits figured when he is entitled to a reduced retirement benefit and a larger spouse’s benefit simultaneously?

The beneficiary will receive the retirement benefit, reduced in the regular manner. That is, the PIA is reduced by 5/9 of 1 percent (1/180) for each of the first thirty-six months that he is under Full Retirement Age (FRA) when benefits commence, and 5/12 of 1 percent (1/240) for each month in excess of thirty-six. The beneficiary will also receive a spouse’s benefit based on the difference between the full spouse’s benefit (1/2 of his or her spouse’s PIA) and his or her PIA. This spouse’s benefit is reduced by 25/36 of 1 percent (1/144) for each of the first thirty-six months that he is under Full Retirement Age when benefits commence, and 5/12 of 1 percent (1/240) for each month in excess of thirty-six.

16. What are the general rules for loss of benefits because of excess earnings?

When the beneficiary is older than the Full Retirement Age (FRA) (see Q 27), no benefits are lost because of his earnings. If he is under the Full Retirement Age, the following rules apply:

• If no more than $41,880 is earned in 2016 by a beneficiary who reaches the Full Retirement Age in 2015, no benefits will be lost for that year.

• If more than $41,880 is earned in 2016 before the month the beneficiary reaches Full Retirement Age, one dollar of benefits will ordinarily be lost for each three dollars of earnings over $41,880.

• If not more than $15,720 is earned in 2016 by a beneficiary who is under the Full Retirement Age for the entire year, no benefits will be lost for that year.

• If more than $15,720 is earned in 2016 by a beneficiary who is under the Full Retirement Age for the entire year, one dollar of benefits will ordinarily be lost for each two dollars of earnings over $15,720.

• No matter how much is earned during 2016, no retirement benefits in the initial year of retirement will be lost for any month in which the beneficiary neither: (1) earns over $1,310 as an employee if retiring in a year prior to the year he reaches Full Retirement Age, nor (2) renders any substantial services in self-employment.

The initial year of retirement is the first year in which he is both entitled to benefits and has a month in which he does not earn over the monthly exempt wage amount (as listed previously) and does not render substantial services in self-employment.

When the monthly earnings test applies, regardless of the amount of annual earnings, the beneficiary gets full benefits for any month in which earnings do not exceed the monthly exempt amount, and the beneficiary does not perform substantial services in self-employment.

The attainment of Full Retirement Age in a year determines which test applies. The Full Retirement Age test applies if the beneficiary attains Full Retirement Age on or before the last day of the taxable year involved. The “under Full Retirement Age” test applies if the beneficiary does not attain Full Retirement Age on or before the last day of the taxable year.

Example. Dr. James, who reports his earnings on a calendar year basis, reaches Full Retirement Age (sixty-six years old) on June 18, 2016. The under Full Retirement Age test ($15,720 for 2015) applies for calendar year 2015, and the Full Retirement Age test ($41,880) applies for calendar year 2015. However, none of Dr. James earnings earned in June through December, 2015, count towards the $41,880 limit.

Example. Miss Norton, who reports her earnings on the basis of a fiscal year ending June 30, attains Full Retirement Age (sixty-six years old) on September 15, 2016. The under Full Retirement Age test ($15,720) applies for her fiscal year July 1, 2015 through June 30, 2016. The Full Retirement Age test ($41,880) applies for her next fiscal year; however, only earnings earned in July and August, 2015 count towards the $41,880 limit.

17. How are “excess” earnings charged against benefits?

In determining the amount of benefits for a given year that will be lost, two factors must be taken into consideration: (1) the amount of the person’s “excess” earnings for the year, and (2) the months in the year that can actually be charged with all or a portion of the excess earnings potentially chargeable in the initial year of retirement.

Both wages earned as an employee and net earnings from self-employment are combined for purposes of determining the individual’s total earnings for the year. Only “excess earnings” are potentially chargeable against benefits. If a person is under the Full Retirement Age (FRA) for the entire year and earns $15,720 or less (in 2016) for the year, there are no “excess earnings.” If earnings for the year are more than $15,720, one-half of the amount over $15,720 is “excess earnings.” In the year a person reaches the Full Retirement Age, he or she can earn up to $41,880 (in 2016) before losing benefits. However, only earnings earned before the month the person reaches Full Retirement Age count toward the $41,880 limit. See Q 184 for a discussion of the Full Retirement Age.

Excess earnings are charged against retirement benefits in the following manner. They are charged first against all benefits payable on the worker’s account for the first month of the year. If any excess earnings remain, they are charged against all benefits payable for the second month of the year, and so on until all the excess earnings have been charged, or no benefits remain for the year. However, a month cannot be charged with any excess earnings and must be skipped if the individual:

(1) was not entitled to benefits for that month,

(2) was over Full Retirement Age in that month,

(3) in the initial year of retirement he or she did not earn over $1,310 (using 2016 figures) if he or she retires in a year before the year he or she reaches Full Retirement Age, or

(4) he or she did not render substantial services as a self-employed person in that month.

If the excess earnings chargeable to a month are less than the benefits payable to the worker and to other persons on his account, the excess is chargeable to each beneficiary in the proportion that the original entitlement rate of each bears to the sum of all their original entitlement rates.

Example 1: Dr. Brown partially retires in January 2016 at the age of sixty-two. Based on his earnings history and the age he starts receiving benefits, his Social Security benefit is $1,200 per month. He practices for three months in 2016 and earns $30,000. The remainder of his initial year of retirement is spent in Florida playing golf. Despite the fact that Dr. Brown has excess earnings in 2016 that would, under the annual test, cause a benefit loss of $7,140, he will lose only the $3,600 in benefits for the three months during which he performed substantial services in self-employment, because 2016 is his initial year of retirement.

Example 2: Dr. Smith, who partially retired in 2015 at age sixty-two, practices for four months in 2016 and earns $32,000. As 2015 is his second year of retirement, the monthly-earnings test does not apply. His benefit will be reduced by $1 for each $2 of earnings over $15,720. This means that Dr. Smith’s benefits in 2015 will be reduced by $8,140 (one-half of the amount in excess of $15,720).

Example 3: Mr. Martin is sixty-six years old and has not retired. He earns $45,000 a year. Mr. Martin receives Social Security retirement benefits of $700 a month. Because he is over the Full Retirement Age, he loses none of his benefits by working.

The annual exempt amount is not prorated in the year of death. In addition, the higher exempt amount applies to persons who die before their date of birth in the year that they otherwise would have attained Full Retirement Age.

18. What kinds of earnings will cause loss of benefits?

Wages received as an employee and net earnings from self-employment. Bonuses, commissions, fees, and earnings from all types of work, whether or not covered by Social Security, count for the retirement test. For example, earnings from family employment are counted – even though such employment is not covered by Social Security. Earnings above the Social Security “earnings base” are counted. Income as an absentee owner counts as “earnings” for the retirement test. If the person renders substantial services as a self-employed person (even in another business), such income also will count as “earnings” for the taxable year in the initial year of retirement.

The following types of income are not counted as “earnings” for purposes of the retirement test:

• Any income from employment earned in or after the month the individual reaches Full Retirement Age (FRA). (Self-employment income earned in the year is not examined as to when earned, but rather is prorated by months, even though actually earned after Full Retirement Age.)

• Any income from self-employment received in a taxable year after the year the individual becomes entitled to benefits, but not attributable to significant services performed after the first month of entitlement to benefits. This income is excluded from gross income only for purposes of the earnings test.

• Damages, attorneys’ fees, interest, or penalties paid under court judgment or by compromise settlement with an employer based on a wage claim. However, back pay recovered in such proceedings counts for the earnings test.

• Payments to secure release of an unexpired contract of employment.

• Certain payments made under a plan or system established for making payments because of the employee’s sickness or accident disability, medical or hospitalization expenses, or death.

• Payments from certain trust funds that are exempt from income tax.

• Payments from certain annuity plans that are exempt from income tax.

• Pensions and retirement pay.

• Sick pay, if paid more than six months after the month the employee last worked.

• Payments-in-kind for domestic service in the employer’s private home, for agricultural labor, for work not in the course of the employer’s trade or business, or the value of meals and lodging furnished under certain conditions.

• Rentals from real estate that cannot be counted in earnings from self-employment because, for instance, the beneficiary did not materially participate in production work on the farm, the beneficiary was not a real estate dealer, etc.

• Interest and dividends from stocks and bonds (unless they are received by a dealer in securities in the course of business).

• Gain or loss from the sale of capital assets, or sale, exchange, or conversion of other property that is not stock in trade or includable in inventory.

• Net operating loss carryovers resulting from self-employment activities.

• Loans received by employees, unless the employees repay the loans by their work.

• Workers’ compensation and unemployment compensation benefits.

• Veterans’ training pay.

• Pay for jury duty.

• Prize winnings from contests, unless the person enters contests as a trade or business.

• Tips paid to an employee that are less than twenty dollars a month or are not paid in cash.

• Payments by an employer that are reimbursements specifically for travel expenses of the employee and that are so identified by the employer at the time of payment.

• Payments to an employee as a reimbursement or allowance for moving expenses, if they are not counted as wages for Social Security purposes.

• Royalties received in or after the year in which a person reaches Full Retirement Age, to the extent that they flow from property created by the person’s own personal efforts that she copyrighted or patented before the taxable year in which she reached Full Retirement Age. These royalties are excluded from gross income from self-employment only for purposes of the earnings test.

• Retirement payments received by a retired partner from a partnership, provided certain conditions are met.

• Certain payments or series of payments paid by an employer to an employee or any of his or her dependents on or after the employment relationship has terminated because of death, retirement for disability, or retirement for age and paid under a plan established by the employer.

• Payments from Individual Retirement Accounts (IRAs) and Keogh Plans.

In other words, a person can receive almost any amount of investment or passive income without loss of benefits.

19. How does the Annual Earnings Test work?

If you take Social Security benefits before reaching Full Retirement Age (FRA), and you earn income in excess of the annual earnings limit, your Social Security benefit will be reduced. Only “earned income” applies — NOT investment income. The annual earnings test limits (in 2016) earnings to $15,720. If your earnings exceed $15,720, Social Security will withhold one dollar of benefits for each two dollars that exceeds the earnings test limit.

During the year you reach Full Retirement Age, and up until the month you reach Full Retirement Age, Social Security will deduct one dollar for every three dollars you earn over the annual earnings limit, however you can earn up to (in 2016) $41,880 during the year you reach Full Retirement Age.

Once you reach Full Retirement Age, you are no longer subject to the annual earnings limit; you can earn as much as you like without incurring a reduction in your Social Security benefits. Your social benefits may however still be subject to income taxes.

20. What is meant by “substantial services” in self-employment?

Whether a self-employed beneficiary is rendering “substantial services” in the initial year of retirement is determined by the actual services rendered in the month. The test is whether the person can reasonably be considered retired in the month. In applying the test, consideration is given to such factors as:

(1) the amount of time devoted to the business (including all time spent at the place of business or elsewhere) in any activity related to the business (including the time spent in planning and managing, as well as doing physical work);

(2) the nature of the services;

(3) the relationship of the activities performed before retirement to those performed after retirement; and

(4) other circumstances, such as the amount of capital the beneficiary has invested in the business, the type of business establishment, the presence of a paid manager, partner, or family member who manages the business, and the seasonal nature of the business.

Generally, services of forty-five hours or less in a month are not considered substantial. However, as few as fifteen hours of service a month could be substantial if, for instance, they involved management of a sizeable business or were spent in a highly skilled occupation. Services of fewer than fifteen hours a month are never considered substantial.

The amount of earnings is not controlling. High earnings do not necessarily mean that substantial services were rendered, nor do low or no earnings mean that they were not rendered.

NOTE: The “substantial services” test is used only for the initial year of retirement. After that, the amount of earnings alone determines whether benefits will be lost.

21. If a self-employed person also receives wages as an employee, what portion of income is subject to tax as self-employment income?

Only the difference between the maximum earnings base for the year and the wages received as an employee is subject to tax as self-employment income.

Example 1. Mr. Smith, an attorney, is employed as a part-time instructor for a law school, and his salary is $30,000 a year. During 2016, Mr. Smith earned an additional $100,000 from his private practice, which counts as $92,350 for Social Security purposes (i.e., 92.35 percent of $100,000). Only $88,500 of his net earnings from self-employment is subject to the OASDI self-employment tax ($118,500 – $30,000). Note, however, that all of Mr. Smith’s wages and $92,350 of his self-employment income are subject to the HI self-employment tax, because all wages and self-employment income are subject to the HI tax.

No self-employment tax is due unless net earnings from self-employment are at least $434 for the taxable year ($400/92.35 percent). Nevertheless, in some cases, the amount of income subject to OASDI self-employment tax may be less than $400.

Example 2. Assume the same facts as in Example 1, except that Mr. Smith’s salary as a law instructor is $118,300. Mr. Smith’s net earnings from self-employment after application of the 92.35 percent factor ($92,350) exceed $400, and therefore must be reported. However, only $200 is subject to the OASDI self-employment tax ($118,500 – $118,300), but the entire $118,300 is subject to the HI tax.

22. For Social Security purposes, what is meant by the term “wages”?

“Wages” mean pay received by an employee for employment covered by the Social Security Act. The maximum amount of wages subject to the Old-Age, Survivors and Disability Insurance tax (OASDI) and credited to a worker’s Social Security record for any calendar year cannot exceed:

$4,800 paid in any of the years………………………………………	1959-1965
$6,600 paid in any of the years………………………………………	1966-1967
$7,800 paid in any of the years………………………………………	1968-1971
$9,000 paid in the year……………………………………………..	1972
$10,800 paid in the year…………………………………………….	1973
$13,200 paid in the year…………………………………………….	1974
$14,100 paid in the year…………………………………………….	1975
$15,300 paid in the year…………………………………………….	1976
$16,500 paid in the year…………………………………………….	1977
$17,700 paid in the year…………………………………………….	1978
$22,900 paid in the year…………………………………………….	1979
$25,900 paid in the year……………………………………………	1980
$29,700 paid in the year……………………………………………	1981
$32,400 paid in the year……………………………………………	1982
$35,700 paid in the year……………………………………………	1983
$37,800 paid in the year……………………………………………	1984
$39,600 paid in the year……………………………………………	1985
$42,000 paid in the year……………………………………………	1986
$43,800 paid in the year……………………………………………	1987
$45,000 paid in the year……………………………………………	1988
$48,000 paid in the year……………………………………………	1989
$51,300 paid in the year……………………………………………	1990
$53,400 paid in the year……………………………………………	1991
$55,500 paid in the year……………………………………………	1992
$57,600 paid in the year……………………………………………	1993
$60,600 paid in the year……………………………………………	1994
$61,200 paid in the year……………………………………………	1995
$62,700 paid in the year……………………………………………	1996
$65,400 paid in the year……………………………………………	1997
$68,400 paid in the year……………………………………………	1998
$72,600 paid in the year……………………………………………	1999
$76,200 paid in the year……………………………………………	2000
$80,400 paid in the year……………………………………………	2001
$84,900 paid in the year……………………………………………	2002
$87,000 paid in the year……………………………………………	2003
$87,900 paid in the year……………………………………………	2004
$90,000 paid in the year……………………………………………	2005
$94,200 paid in the year……………………………………………	2006
$97,500 paid in the year……………………………………………	2007
$102,000 paid in the year…………………………………………..	2008
$106,800 paid in any of the years…………………………………… $110,100 paid in the year……………………………………………	2009-2011 2012
$113,700 paid in the year……………………………………………	2013
$117,000 paid in the year……………………………………………	2014
$118,500 paid in the year	2015-2016

Employees pay the tax on wages up to the base amount from each employer, but receive a refund on their income tax returns for the excess of total taxes paid over the tax on the base amount. Each employer pays the tax on wages up to the base amount for all of its employees. In addition to the regular Social Security tax on wages, all wages are subject to the Part A Medicare Hospital Insurance tax (HI).

The maximum earnings base is automatically adjusted each year by the Social Security Administration, if average nationwide (covered and noncovered) total wages have increased.

Note that the maximum amount of wages subject to the OASDI tax is also the maximum amount credited to a worker’s record. For example, if an employee is paid $118,500 or less in 2016, the full amount of wages will be subject to OASDI tax and will be credited to the Social Security record for benefit purposes. But if an employee is paid $120,000 in 2016, only $118,500 will be subject to OASDI tax and credited to the Social Security record (but HI taxes will be paid on the entire $120,000). In other words, earnings in excess of the maximum amount for a particular calendar year are not considered wages for Social Security coverage purposes.

A stabilizer provision protects the system from trust-fund depletions that could occur when price increases outpace wage gains. This stabilizer provision goes into effect if reserves in the trust funds providing retirement, disability, and survivor benefits fall below 20 percent of what is needed to meet outgo for a year. When the stabilizer takes effect, automatic cost-of-living benefit increases will be based on the lower of the annual percentage increase in the Consumer Price Index or the annual percentage rise in the nation’s average wage.

Later, if the fund reserves exceed 32 percent of what is estimated to be needed for a year, recipients will be entitled to extra cost-of-living increases, to compensate for losses in inflation protection resulting from having benefit increases tied to wage levels.

Social Security