While it may seem that deciding to retire and deciding to claim Social Security go hand in hand, the reality is that the two decisions are entirely distinct. They don't necessarily occur simultaneously.

Many people continue to work well after they have begun to collect Social Security benefits. That decision can create tax complications that often don't exist if an individual decides to stop working entirely upon claiming Social Security. Additional complications arise with respect to increased Medicare costs for high-income beneficiaries.

These complexities aren't a reason to stop earning income — in fact, the benefits of continuing to work often outweigh any resulting financial complications. That said, it's important that clients understand how their decision to work may affect their Social Security and Medicare benefits to avoid unpleasant future surprises.

Social Security Tax Mechanics

Until a beneficiary reaches full retirement age (currently, age 67), it's very likely that a portion of their Social Security benefits will be taxed. Social Security benefits are subject to a unique set of tax rules — the key thing to remember is that they are subject to federal income taxation.

The tax treatment of Social Security depends on a concept called "combined income." Combined income is calculated by adding up a taxpayer's adjusted gross income, one-half of their Social Security benefits, and tax-exempt interest income received during the tax year.

Once a taxpayer's combined income exceeds certain base amounts, a portion of their Social Security benefits are includible in gross income (and are taxable as ordinary income).

Based on this calculation, single filers and heads of households with between $25,000 and $34,000 in combined income typically see up to 50% of their Social Security benefits subject to tax. If their combined income is more than $34,000, up to 85% of their benefits are taxed.

For married couples, the combined income thresholds are increased so that couples with combined income of between $32,000 and $44,000 see up to 50% of their benefits taxed. When combined income exceeds $44,000, up to 85% of benefits are taxed.

While Social Security benefits themselves are indexed for inflation and tend to increase each year, these threshold levels are not adjusted each year to account for inflation. This has created a situation where even very low-income Social Security beneficiaries are paying taxes on at least a portion of their benefits.

Earnings Test

Taxpayers who claim benefits before their full retirement age are also subject to an earnings test, which is a formula that withholds a portion of the individual's Social Security benefits based on their earnings levels (the earnings test applies once a taxpayer's earnings exceed $24,480 in 2026). Once they reach full retirement age, those withheld benefits are credited to the taxpayer (the Social Security Administration provides a calculator).

Understanding the Medicare IRMAA

Many high-income taxpayers don't realize that their income levels will affect their Medicare premium payments. That's often true even after retirement. The Medicare income-related monthly adjustment amount is a surcharge that's added to base-level Medicare Part B and Part D premiums for higher-income taxpayers. The IRMAA surcharge is adjusted annually for inflation.

The IRMAA applies on a sliding scale, based on the taxpayer's modified adjusted gross income, or MAGI. Clients in higher income tiers have higher Medicare premium costs.

MAGI for IRMAA purposes is the taxpayer's adjusted gross income plus:

  • The taxable portion of their Social Security benefits
  • Tax-exempt interest
  • Interest from U.S. savings bonds used for qualifying education expenses
  • Nontaxable income from U.S. territories
  • Any income earned abroad that was excluded from AGI.

One key rule to remember is that the system bases those IRMAA surcharges on the taxpayer's MAGI from two years ago. That means clients who enroll in Medicare during 2026 will find that their premium liability is based on their income levels in 2024. So, the decision to keep working in 2026 may affect the taxpayer's IRMAA as far out as 2028.

In 2026, IRMAA affects single taxpayers with income greater than $109,000 and joint filers who earn more than $218,000. At these income levels, a relatively small IRMAA of $81.20 for Part B and $14.50 for Part D is added onto the base premiums of $202.90 per month for 2026. The IRMAA amounts rise sharply as the taxpayer's income increases.

When a taxpayer's income changes, they can submit Form SSA-44, "Medicare Income-Related Monthly Adjustment Amount Life-Changing Event" to their Social Security to qualify for an IRMAA reduction. Both "work reduction" and "work stoppage" qualify as life-changing events.

Additional Considerations

It's also important to remember that wages are always subject to federal income, Social Security and Medicare taxes even after the taxpayer begins claiming Social Security and enrolls in Medicare.

Distributions from traditional retirement accounts — including required minimum distributions — are also taxable.

Planning can be key to reducing overall taxation on Social Security and reducing the client's Medicare IRMAA. Pre-retirement Roth conversions can create a source of nontaxable income to draw upon during retirement — and maxing out traditional pre-tax contributions can reduce the individual's MAGI during working years.

Conclusion

Every client's situation is different. For many, continuing to work while claiming Social Security is beneficial on many levels. However, it's important to obtain a clear picture about the complex financial issues that can arise due to the decision to continue working.

  • Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
  • Discover more resources on finance and taxes on the NU Resource Center.
  • Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
  • Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.

NOT FOR REPRINT

© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.