Are you worried that you’ll lose your Social Security benefits because you’re still working? Good news! Not all income counts toward your Social Security earnings limit! I’ve helped hundreds of clients figure this out, and today I’m going to explain it all to you.
If you’re under your full retirement age and receiving Social Security benefits, understanding what income does and doesn’t count toward the earnings test is absolutely crucial. The wrong move could cost you thousands in benefits!
Understanding the Social Security Earnings Test
Let’s quickly go over how the earnings test works before we get into what income doesn’t count.
If you’re collecting Social Security benefits before reaching your full retirement age, the Social Security Administration (SSA) limits how much you can earn before they start reducing your benefits. For 2023, that limit is $21,240.
The SSA takes away $1 from your benefits for every $2 you earn over this limit. However, this changes when you reach full retirement age. That’s when the earnings limit almost triples, and the SSA only takes away $1 for every $3 you earn over the limit.
When you reach full retirement age, the earnings test goes away for good. There is no limit on how much you can earn and still get your full Social Security check.
What Income Doesn’t Count Against Social Security?
Now for the good stuff! Here’s a comprehensive list of income sources that do NOT count toward the Social Security earnings limit:
Common Income Types That Don’t Count:
-
Investment Income:
- Dividends from stocks
- Interest income from savings accounts, CDs, or bonds
- Capital gains from selling investments
-
Retirement Account Distributions:
- IRA withdrawals
- 401(k) and other retirement plan distributions
- Keogh Plan distributions
-
Other Income Sources:
- Pension payments
- Most annuity payments
- Rental income (if you’re not a real estate professional)
- Inheritance money
Additional Income Types Not Counted by SSA:
- Damages, attorney fees, or settlements from wage claims (though back pay does count)
- Payments to release you from an employment contract
- Certain payments for sickness or accident disability
- Payments from specific tax-exempt trust funds
- Workers’ compensation benefits
- Unemployment compensation
- Veterans’ training pay
- Jury duty pay
- Prize winnings (unless entering contests is your business)
- Small tips (less than $20/month)
- Travel expense reimbursements
- Moving expense reimbursements
- Certain royalties received after your full retirement age
- Retirement payments from a partnership (under specific conditions)
What DOES Count Toward the Earnings Limit?
To be clear, the income that DOES count against your Social Security benefits is:
- Employment wages (your gross amount before taxes)
- Net earnings from self-employment
This means if you’re working part-time or running your own business in retirement, these earnings will count against the limit.
Timing Matters Too!
It’s not just about what type of income you receive but WHEN you receive it. Here’s how timing affects the earnings test:
- For employees: Income counts when it’s EARNED, not when it’s paid
- For self-employed individuals: Income counts when it’s RECEIVED, unless it’s paid after you start getting Social Security but was earned before
Full Retirement Age Chart
Your full retirement age depends on when you were born. Here’s a quick reference:
| Birth Year | Full Retirement Age |
|---|---|
| 1943-1954 | 66 years |
| 1955 | 66 years, 2 months |
| 1956 | 66 years, 4 months |
| 1957 | 66 years, 6 months |
| 1958 | 66 years, 8 months |
| 1959 | 66 years, 10 months |
| 1960 or later | 67 years |
What To Do If You Get an Overpayment Notice
If you receive a notice from the SSA claiming you exceeded the earnings limit, don’t panic and don’t immediately assume you need to pay it back! The SSA isn’t always right.
I’ve seen many cases where all my client needed to do was write a letter explaining why the income shouldn’t count toward the earnings test. The SSA often sends these notices without investigating fully – similar to how the IRS might assume the entire amount from a stock sale is taxable gain if you don’t provide the cost basis.
If you get an overpayment notice:
- Review what income sources are being counted
- Determine if they truly should count under the rules
- Write a detailed letter explaining your situation
- Include documentation supporting your position
- Submit your response before the deadline
Real-World Example
Let me share a quick example. My client Barbara was 64 and receiving Social Security when she got an overpayment notice. The SSA counted her IRA distribution of $30,000 toward the earnings limit and wanted to reduce her benefits.
We wrote a letter explaining that IRA distributions don’t count toward the earnings test, cited the Social Security Handbook section 1812, and included her tax return showing the distribution was properly coded as retirement income. The SSA reversed their decision, and Barbara kept her full benefits.
Some Common Questions I Get
Does rental income count against Social Security?
Generally no, rental income doesn’t count against the earnings test UNLESS you’re a real estate professional who actively manages properties as your business.
Do capital gains count against Social Security?
Nope! Capital gains from selling investments don’t count toward the earnings limit. You can sell stocks, bonds, or real estate and realize gains without affecting your Social Security benefits.
Do 401(k) withdrawals count as income for Social Security?
401(k) withdrawals do NOT count against the Social Security earnings limit. You can take as much as you want from your retirement accounts without triggering a reduction in benefits.
Final Thoughts
Understanding what income doesn’t count against Social Security can make a huge difference in your retirement planning. I’ve seen many folks unnecessarily limit their income because they didn’t realize certain types of income are exempt from the earnings test.
If you’re under full retirement age and receiving Social Security benefits, focus on generating income from sources that don’t count toward the earnings limit. This strategic approach can help you maximize both your income and your benefits.
Remember, the rules around Social Security are constantly evolving. The income limit increases annually, and there’s always talk in Washington about changing the system. Stay informed by checking the SSA’s website annually or subscribing to updates from trusted sources.
Have you dealt with the Social Security earnings test? I’d love to hear your experiences in the comments below!
Disclaimer: This article is for informational purposes only and is not tax or legal advice. While I’ve made every effort to provide accurate information, Social Security rules are complex and subject to change. Please consult with a qualified professional for advice specific to your situation.
