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  • Writer's pictureChris Stein, CFP®

Paying Back Social Security Benefits

A reader from Mississippi asks if his wife will have to pay back her Social Security benefit after returning to work.

 

"My wife retired in January 2023 and started receiving her Social Security retirement benefit in March 2023, when she turned 62. She returned to work in November 2023 and will earn more than $1,770 in November and December. We spoke to a Social Security representative tonight to report she was working and were essentially told not to worry about it because she was in her "grace year" through February 2024. Based on what I have read, this didn't make sense. Please enlighten us. What are our options? Will she have to pay back her November and December Social Security benefits because her earnings exceed $1,770?"

 

This is a good question. We haven't talked about "grace year" for a while, so this gives me a chance to get readers up to speed on that topic. What you're referring to is a variation on the earnings test for Social Security. The basic rule is that the earnings test (or earnings limit) applies when you claim your Social Security before your Full Retirement Age (FRA) and continue earning income. An important detail is that the month you reach your FRA, the earnings test can no longer be applied.

 

The earnings test works like this: If you're receiving a Social Security benefit before your FRA, you will be affected by the earnings test if you earn over certain limits. And that limit for 2023 is $21,240, or the equivalent of the $1,770 you mentioned. That limit applies in all years before you reach your FRA until the year you reach your FRA. That year, the earnings limit is much higher: $56,520 for 2023. Most people's concern is the lower limit in the earlier years before their FRA.

 

If you're collecting a Social Security benefit and earn more than $21,240, Social Security will reduce your benefit by $1 for every $2 you earn over that $21,240 limit. In the year of FRA, the offset is much less. It's $1 for every $3 you earn over that much higher limit of $56,520.

 

Your wife, at 62, is in that earlier phase where she is affected by the $21,240 cap. But Social Security realizes people often work for part of the year, then retire and no longer have earnings. They decided the basic earnings test rule would be unfair to people who made more than the $21,240 limit early in the year and then had no income once they went on Social Security. To rectify that, they created the Special Earnings Limit Rule, generally known as the "grace year."

 

In the grace year, if it benefits you, Social Security will apply the earnings test on a monthly basis instead of on an annualized basis. That's where your $1,770 comes in. They effectively say, "We will ignore the annual earnings test if when you are on Social Security, during the first 12 months of claiming, you don't make more than the monthly amount of $1,770 (in 2023). We don't care how much you made in the months before you filed for Social Security. We'll ignore that even if you made a ton of money in the early months of the year because now you're making zero – or at least less than the $1,770 per month." It's a way for them to replace the annual earnings test with a monthly one.

 

You're concerned because your wife returned to work and will make more than $1,770 monthly in November and December. Let's look at this more carefully. You stated that she retired in January, so unless she made a ton of money in January, she will likely be below the annual earnings test limit. In that case, the monthly limit doesn't affect her. Let's say she will make $3,000 a month, which is clearly above the $1,770 you mentioned, but it's still only $6,000 for November and December.

 

I do think the Social Security representative was correct in saying, "Don't worry about it." However, the representative gave you that answer for the wrong reason. Your wife is not in the clear because she is in her grace year. Typically, if she earned $3,000 in a month in which the special rule somewhat sheltered her, she clearly exceeded the $1,770 limit. Social Security then says, "Well, we're not going to apply the monthly earnings limit this month. We'll look at the yearly test and apply it that way, which might wipe out her benefit for that month." But then, they'll look at it again the month after that.

 

The excess income doesn't permanently harm her but might destroy her benefit for the month she went over. That's essentially what they do: they fall back on the annual test if someone exceeds that amount during the grace year by any amount, even $1. They say, "Well, you've violated the rule. We're going back to the annual application of the earnings test."

 

I suspect this is a non-issue for your wife because the chances are limited that she earned more than $21,240 if she retired in January and is only earning some undefined amount (over $1,770) for two months that same year. However, you didn't share how much more than $1,770 she's earning, so she could blow through the annual limit. If that's the case, yes, if she made a ton of money in January before retiring, and she's making a lot more than the $1,770 in November and December, she might find herself subject to the annual test for November and December and completely wipe out the benefit.

 

Keep in mind that the earnings test won't apply to the months between March and November because your wife was not working at all. She was retired. She had first claimed in March 2023. Her grace year only applies during the first 12 months of claiming a Social Security benefit, going through February 2024. Social Security looks at each month independently, and if her earnings exceed the monthly limit, she exposes herself to the annual limit.

 

I think the annual amount is going to protect your wife. You didn't give me all the details so I could promise she wouldn't be affected. But if I read between the lines and look at a reasonable interpretation of her situation, she is probably fine. It will, however, depend on how much she made in January before retiring and then how much she made in November and December. She will not be subject to the earnings test if the total is under the annual limit.

 

Also, under that grace year's special rule, if a month's excess earnings trigger the application of the earnings deduction, it's not as if Social Security will abandon the application of the annual earnings limit. If the annual limits are beneficial to your wife, then she wins. If the monthly application benefits her, then she wins there, too. It's a win-win. It's not like she can't go back after triggering a monthly application. That's not how it works. Instead, as I see it, Social Security is looking at it simultaneously.

 

In short, I think you and your wife are fine. We'll revisit this answer if I'm made aware of any other details that materially change my earnings assumptions. But in the case of most people, my answer applies.

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