I retired May 31st. The 1st yr rule w/SSA says there's no penalty for earning > the allowed amt yet they're taxing 85% of my SSA. How do you use this rule on your 1040?

[rjsneed61]

I did not work after May 31st and only received SSA the second half of the year. The SSA website states that they know people who retire midyear have probably gone over the earnings limit and that is why there is this rule. The tax software doesn't address this.

[Opus 17]

Sorry, you are confused.  The 2 rules you are thinking of are completely separate.

1. If you retire before full retirement age, and you have too much income from working, your benefit will be reduced in the following year.  This rule only applies to income from working and not to other income like a pension or IRA withdrawal.  This rule also does not apply in the year you retire.  It had nothing to do with income taxes, only how your benefit payment is calculated.

2. At any time, your benefit may be taxable if you have other income more than a certain amount.  This applies to your benefit at any time, there is no exception for the first year, and it applies to all taxable income including pensions and IRA withdrawals. 

https://www.ssa.gov/benefits/retirement/planner/taxes.html

[Vanessa A]

I believe what you are referring to with the first year rule is you can make however much and it doesn't affect your social security benefits?

This is not the same as how it affects your taxes.  Your taxable social security is calculated by taking your AGI, plus nontaxable interest and half of your SS benefits. Then compared to the chart below to determine how much of your SS is taxable. 

If you fall into the following, 85% of your social security is taxable income

• Single with income above $34,000
• Married Filing Jointly with income above $44,000
• Married Filing Separate regardless of income

If you fall into the following, 50% of your social security is taxable income

• Single with combined income between $25,000-$34,000
• Married Filing Jointly with combined income between $32,000 and $44,000

Your combined income is calculated by adding your

• AGI plus
• Nontaxable Interest plus
• 1/2 of your social security Benefits

Social Security Benefits Taxes