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Another great question from a reader this week:
“Regarding earnings test, can you please clarify the timing and mechanics? I cannot determine if the earnings test uses previous year’s income or current year’s income. It seems like the earnings test would be based on current income but then how would they know how much to withhold?”
What Matters
The earnings that matter are the earnings in the months/years you are collecting benefits prior to your full retirement age. The test is not about last year’s earnings. They will know about your earnings two ways:
You proactively tell them. They will then calculate any reduction and send you benefits based on the earnings you told them.
You do not tell them and they find out when they receive IRS information at the end of the year.
You Should Be Proactive
The downside to letting them find out through the IRS is that once they find out and then retroactively figure out how much they have overpaid you, they will default to withholding 100% of your monthly benefits until the over-payment is satisfied. For this reason we always recommend that you be up-front with them and tell them about any expected earnings.
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