Back to Work? Check Tax, Social Security, Medicare Impacts

Retirees hit by investment losses face tax and benefit issues in return to work.

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One of the clearest messages from financial advisers is that retirees should consider going back to work if their nest eggs have been badly hit by investment losses.

Easier said than done. The economy is shedding jobs at a scary pace, and it's widely expected the slowdown will get worse and last well into next year if not 2010.

Still, in an economy as large as ours, there are always opportunities. We'll also be seeing part-time jobs replacing full-time positions. Further, our well-publicized economic travails reportedly are scaring away immigrants, and there will be some domestic employment benefits of this trend.

So, if you need the bucks, you should consider jumping back into the working world. But first, you should carefully look at the bottom-line benefits of extra earnings. Is the amount of extra money in your pocket worth your return to work?

There are the obvious expenses of employment: commuting, meals, new clothing, and work accessories. It may cost you money to look for work, and you might face some retraining expenses.

Less obvious, perhaps, are the implications of higher taxable income for your Social Security and Medicare benefits, as well as your federal and state income taxes.

If you are already collecting Social Security benefits, the Social Security Administration has details about the impact of going back to work. Generally, if you're already at full retirement age, any extra earnings will not affect your Social Security payments. Here's the full retirement age table:

Year of birth Full retirement age
1937 and earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943-1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

For those who began collecting benefits at a younger age, a Social Security spokeswoman provided these rules:

If you are under full retirement age (FRA) when you start getting your Social Security payments, $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2008, that limit is $13,560. In 2009, that limit will be $14,160.

In the year you reach your FRA: $1 in benefits will be deducted for each $3 you earn above a different limit, but only counting earnings before the month you reach FRA. For 2008, this limit is $36,120. In 2009, that limit will be $37,680.

Keep in mind that these Social Security earnings tests count only wage earnings and net self-employment earnings (after all business expenses have been deducted). Income from other sources, such as pensions and investments, is not included.

One other wrinkle: You have not lost these benefits forever. If your Social Security benefits are reduced because of wage earnings, this money will be returned to you, beginning when you reach full retirement age and extending for a number of months that matches the earlier period during which your benefits were reduced. Of course, that could be several years down the road.

Your extra income can also affect taxation of your Social Security benefits. There are two primary scenarios here. The first is whether one half of your Social Security benefits and your other taxable income (wages, self-employment, pensions, and investments) total less than $25,000 for single and separate filers and $32,000 for joint filers. If so, you have no federal income tax obligations.

If not, you will face taxes on the amount by which this total exceeds the $25,000 or $32,000 thresholds.

The second scenario takes effect if half your Social Security benefits and your other taxable income exceed $34,000 for separate filers and $44,000 for joint filers. If that's the case, up to 85 percent of your Social Security benefits may be taxable.

These basic rules can also be affected by special circumstances, such as a lump-sum pension distribution. You should carefully review the Internal Revenue Service details on taxation of Social Security benefits.

Lastly, if you're receiving Medicare benefits, there's the question of how going back to work might affect you. Will the extra income kick you into a higher premium category, and what happens if your employer offers any health coverage?

Here are the income bands for Medicare premiums in 2008:

Part B (Medical Insurance) Monthly Premium
If your yearly income is:    
File Individual Tax Return File Joint Tax Return You pay
$82,000 or below $164,000 or below $96.40*
$82,001-$102,000 $164,001-$204,000 $122.20*
$102,001-$153,000 $204,001-$306,000 $160.90*
$153,001-$205,000 $306,001-$410,000 $199.70*
Above $205,000 Above $410,000 $238.40*

* You also pay a Medicare Part B ($135 in 2008) deductible each year before Medicare starts to pay its share.

If you are offered private health insurance at your new job, you should find out how its cost and coverage compare with Medicare coverage, especially for your particular health or medication needs. The issue of who covers what can be complicated, however, so you should review the Medicare guidelines and ask your private-plan administrator about the impact on your benefits, costs, and choices.

You can suspend your Medicare coverage when you begin private group insurance, a Medicare spokesperson says, and then resume it later. Or, you might decide Medicare is a better value than taking the private coverage. The choice is yours.