Earnings Test Explained
If a Social Security recipient is younger than their full retirement age, and they have earnings either from work, investments, or other types of income streams they may be subject to an earnings test. The earnings test applies to all who are working and receiving Social Security benefits prior to their full retirement age (FRA). Full retirement age is determined based on the claimants date of birth. This chart may be helpful for identifying a client's FRA.
The Social Security Administration's Program Operations Manual System (POMS) outlines which income is included in the earnings test.
Earned income includes the following for a taxable year.:
- gross wages for services rendered
- plus all net earnings from self-employment,
- minus any net loss from self-employment
Typical income not included as earnings include:
- retirement income such as a 401(k), 403(b), etc...
- retirement income such as a pension
Identify the type of income. Verify whether the income is counted or not counted. If it is counted then add that to any other income and determine if the earnings test threshold has been breached.
Add the appropriate earnings into Social Security Timing and Income InSight by
Step 1: Enter income by selecting the “income" folder.
Step 2: Click "Add Income."
Step 3: Enter the monthly earnings for your client. Choose "Earned Income" for the income type to ensure that the earnings will be counted towards the earnings test. Select either specified date, age, or death as an end date for the income. It is important to note that incomes entered here will not impact the Social Security benefit estimate just the earnings test.
Step 4: Past and future earnings are entered under historical earnings entered under the Social Security Folder. Select Social Security folder for either the client or spouse.
Step 5: Select historical earnings and enter the starting year from the client's Social Security statement. The stop work date should be the date in which the client plans to stop working.
The earnings test will be calculated once you enter historical earnings past the client’s eligibility age (62 for retirement benefits, 60 for widow(er)s benefits) through the year the client reaches full retirement age. Any reductions will be outlined in the strategy instructions. This calculation is applicable to both Social Security Timing and Income InSight.