Retirement is supposed to be a time of freedom, but failing to save enough during your working years can turn it into a time of serious financial instability. You may be able to mitigate this by working to increase your Social Security benefits. But sometimes, larger Social Security benefits carry hidden drawbacks.
Here are two scenarios where big Social Security checks might not help you as much as you’d like.
1. Big Checks May Put You at Risk of Paying Social Security Benefits Taxes
the federal government and 12 state government Taxing Social Security benefits for some seniors. The amount you owe, if any, depends on your income, annual Social Security benefit, or both. But each government has its own system for calculating benefit taxes.
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The federal government taxes up to 50% of your benefits if your temporary income – your Adjusted Gross Income (AGI), that is, non-taxable interest, and half of the annual Social Security benefit – exceeding $25,000 for a single adult or $32,000 for a married couple. It will tax unmarried adults with temporary incomes greater than $34,000 and spouses with temporary incomes greater than $44,000, taxing up to 85% of benefits.
Just because you can owe that much doesn’t mean you will really owe it. Many seniors don’t owe any benefits taxes, but if you think you might, plan accordingly.
Pay attention to your spending each year and, if possible, avoid exceeding the above limits. If you have Roth savings, these withdrawals won’t affect your tax liability at all. You pay taxes on your contributions to these accounts when you make them, so the government usually doesn’t take out taxes.
2. Big checks can lead to withholding if it is an overpayment
Social Security eligibility Overpayments can occur for a variety of reasons, including incorrect information used to determine your benefits or to change your living or marital status.
If the Social Security Administration paid a large amount in error, they must notify you by mail of the error. It will tell you how much you overpaid and offer ways to correct the problem. Failure to do so may result in a withholding of wages or the government withholding money from future Social Security benefits until the debt is paid.
Seniors who have received overpayments can choose to withhold money from future Social Security checks until the extra money is paid. Or they can pay the government directly by check, EFT or credit card.
If you believe that the overpayment was not in fact an overpayment, you can appeal the decision by filing a form SSA-561 and submit it within 60 days of receiving your overpayment notice. You can also ask the government to waive collecting the overpayment if it’s not your fault or if paying it would lead to financial hardship.
For most people, large Social Security checks are a good thing. But if you find yourself in any of these situations, ignoring them can have serious consequences for your finances. So take the steps discussed here ASAP so you can get your money back to normal.
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