American Dream

5 Social Security Facts You Didn’t Know

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My grandparents are among the many Americans living solely off Social Security benefits in their retirement, and it’s been financially tough for them. While they did pay off their mortgage before heading into retirement, they’ve been surprised on more than one occasion with both how it works and how little it pays. Because of their difficulties—they’ve even taken out a reverse mortgage to help them survive—they now teach their grandchildren the importance of saving up for retirement.

You don’t want to be surprised by the ins and outs of Social Security when you’re counting on that money as part, or even all, of your income. Stay out of the school of hard knocks by educating yourself now about some of its lesser-known facts.

Fact #1: You May Not Receive Your Full Retirement Benefits

As grim as the option of leaving your retirement happiness up to the government is, it might not be an option at all for future generations. If Congress doesn’t act, Social Security funding will be depleted to the point where it can only pay 77 percent of its responsibilities by 2033.

Fact #2: Your Benefits May Be Taxed

You may not receive a benefits check free and clear. If you do but then your circumstances change, you might owe money come April of the following year.

The IRS uses a combined income formula to figure out how much in taxes you owe, which includes your adjusted gross income, non-taxable interest, and half of a person’s Social Security benefits. If the combined income formula is less than $25,000 for single taxpayers or $32,000 for a couple, you won’t have to pay federal income taxes on your benefits.

Fact #3: You Can Earn Money on the Side Without Reducing Your Benefits

Many retired Americans know all too well the lifestyle sacrifices you’ll have to make if you try to live off Social Security alone. This is especially true if you retire while still paying significant obligations, such as a mortgage.

But here’s a nice loophole: You can earn some money on the side without the government reducing your benefits. If you start collecting before your full retirement age, you’re allowed to earn up to $15,720 (in 2015) before deductions are made to your benefits—$1 per payment for every $2 earned above the annual cap. Once you reach full retirement age, you can earn as much as you’d like without a reduction to your benefits.

Fact #4: You May Be Able to Claim Your Ex-Spouse’s Income

Were you married to your ex-spouse for at least 10 years and never remarried? Come time for retirement, you could make a claim on their income to raise your own benefit amount. That claim would be based on up to half of your ex’s earnings or on the basis of your own earnings, whichever is higher.

Note: Whether an ex-spouse makes a claim on your work history makes no difference to the amount you’ll receive.

Fact #5: People Who Don’t Pay Taxes May Still Be Eligible

More than 40 percent of Americans don’t pay federal income taxes, yet many of these folks can legally claim their benefits.

This little-known fact often leaves taxpayers indignant when they first hear it, but not all types of income are taxable, and those who don’t pay federal income tax will still have to pay other taxes. For the purposes of this article, know that Social Security eligibility is open to almost anyone who worked for 10 years or more, earning a minimum of $1,220 per quarter.

Ready for an bonus fact? The maximum monthly benefit in 2014 was $2,642. If you are curious about what your own benefits may look like when you’re ready to retire, check out an estimate on SSA.gov.

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Amanda L. Grossman is the creator and owner of FrugalConfessions.com -- live a VIP life on an average paycheck -- where she shows hard-working people how to end anemic savings account syndrome and pay off debt years earlier than your creditors want you to without getting a second job or eating ramen noodle dinners. Amanda's area of expertise is in personal finance, and she has authored several personal finance articles for the Houston Chronicle, is a featured blogger at the Houston Chronicle, and has staff written for ReadyforZero.com Blog and RelayRides.com Blog (several of which have been syndicated to LifeHacker, Business Insider, and Yahoo Finance). She has a knack for taking seemingly complex, and irrelevant financial topics and making them accessible and meaningful to the average person. She, her husband, and their two cats (Lyla Bear and Danny Boy) live in a fixer-upper in Houston TX.