Two exempt amounts and two rates apply, and which pair you face depends on the calendar year rather than your age on any given day. For a beneficiary who is below full retirement age for the whole year, the annual exempt amount is $24,480 and excess earnings are 50 percent of everything above it. In the year the beneficiary reaches full retirement age a much larger exempt amount applies, $65,160, the rate falls to one third, and the statute excludes any earnings for the month of the birthday and every month after it. So a person turning 67 in September is tested only on January through August earnings, against the higher figure.
The exempt amounts move with wages rather than with prices. Under 20 CFR 404.430 the lower amount is calculated from a 1994 base of $670 a month scaled by the national average wage index, and the higher amount from a 2002 base of $2,500 a month on the same principle. Both are rounded to the nearest $10 and then multiplied by twelve. That is why the earnings test figures do not necessarily move by the same percentage as the annual cost-of-living adjustment, which is tied to prices, and why in a year of weak wage growth they can barely move at all.
What counts is narrower than most people expect. The regulation defining earnings for this purpose, 20 CFR 404.429, reaches wages for services plus net earnings from self-employment. Investment income, pension and annuity payments, distributions from a 401(k) or an IRA, and rent are all outside it. The practical consequence is that a retiree can draw heavily on a portfolio without touching the test at all, though those withdrawals can still affect how much of the benefit is subject to income tax, which is a separate question governed by provisional income.
The consequence that surprises families is that the withholding does not stop with the worker. Under 20 CFR 404.415(b), a husband's, wife's or child's benefit paid on the insured worker's earnings record is reduced because of the worker's excess earnings, and 20 CFR 404.434(b)(1) puts it starkly: for each dollar of excess earnings the agency decreases by a dollar the benefits payable to the worker and to everyone else on that record. One group is carved out. Since January 1985 the agency does not reduce benefits payable to a divorced spouse who has been divorced from the worker for at least two years. A household running the arithmetic on one benefit can therefore understate what a year of high earnings costs.
There is also a monthly version of the test, and it exists for the year someone actually stops working. Under 20 CFR 404.435 a beneficiary gets a grace year, defined as the first taxable year containing a non-service month while entitled to benefits. In a grace year the monthly exempt amount applies, which the regulation states is one twelfth of the annual figure, and a month counts as a non-service month based on services performed rather than money received. Someone who retires mid-year with a large amount of earnings already banked can therefore be paid for the remaining months even though annual earnings far exceed the annual limit. A further grace year can arise later if entitlement to one type of benefit ends, at least a month passes, and entitlement to a different type begins.
Self-employment is treated differently in a way worth knowing before the year starts. The same regulation presumes you performed substantial services in every month of the year until you show otherwise, and a month in which you performed substantial services in your own trade or business counts as a service month even if no money arrived that month. A consultant who invoices irregularly is judged on the work, not on the deposits.
