In today’s retirement landscape, working during retirement andwhile claiming Social Security benefits has become arelatively common occurrence—but what are the rules when only onespouse continues to work during retirement?

And how do modern complications such as divorce and dualearnings records factor in? While the basic rules for taxingSocial Security benefits during a workingretirement are relatively straightforward, when modern daycomplications are factored into the equation the results areanything but simple.

This magnifies the importance of the advisor’s role in providingguidance on the impact of simultaneously working and claimingSocial Security benefits in order to maximize Social Securityduring a working retirement.

The working retirement Social Security tax

As is becoming extremely common, a client can begin tocollect Social Security benefits even while he orshe continues to work and earn income. However, a portion of thatbenefit will be subject to tax rules that differ from the otherwiseapplicable tax rates.

In 2017, if a client a client is younger than full retirementage, collects Social Security early and earns morethan $16,920, his or her Social Security benefitwill be reduced by $1 for every $2 that he or she earns over thatlimit.

This earnings limit is applied on a calendar year basis(January-December), rather than based on the individual client'sbirthday. The limit is also indexed annually for inflation (theamount for 2016 was $15,720).

During the year in which the client reaches full retirement age,the lower $16,920 amount is increased to $44,880 in the monthsprior to the month in which the client actually reaches fullretirement age.

Further, during those months, his orher Social Security benefits are only reduced by $1for every $3 that is earned above the $44,880 limit. Forexample, if the client reaches full retirement age in September,his or her benefit will be reduced during the months of Januarythrough August, assuming his or her earned income exceeds$44,880.

Once the client reaches full retirement age, his or her benefitis no longer reduced regardless of earned income.

The spousal income complication

The complication that arises in applying the earnings testsdiscussed above is that, in many cases, both spouses in a marriagehave their own independent earnings records upon which SocialSecurity benefits can be based.

Further, it is entirely possible that only one spouse willcontinue to work during retirement, so that uncertainty can ariseover whether and when the earnings test will apply to reducebenefits.

Generally, the reduction, or working retirement tax, on SocialSecurity benefits will only apply if the spouse whose earningsrecord is used to determine the amount of the benefits is also thespouse who continues to work.

However, added complications can arise when one spouse decidesto file a restricted application (an option that remains even afterthe phase-out of “file and suspend”) in order to cease receivinghis or her own benefits and collect half of the other spouse’savailable benefit.

This strategy can prove useful in situations where it isbeneficial to allow the “restricting” spouse’s benefit to growuntil he or she reaches age 70.

In this case, the spousal benefit that is received is based onthe spouse’s earnings record, so if that spouse continues to work,the earnings test and applicable taxes will apply even though thespouse who is actually collecting the benefits has reached fullretirement age (so is no longer subject to the earnings test) anddoes not work.

However, once the working spouse reaches full retirement age,the Social Security Administration recalculates his or her benefitsto treat that spouse as though he or she had waited to claimbenefits (i.e., if the earnings test results in three months’ worthof lost benefits for three years, the client will be treated asthough he or she had begun claiming benefits nine months after theactual claim was made).

With divorced spouses, the continued earnings of a former spousedoes not impact the ability of the other ex-spouse to claimbenefits based on that working ex-spouse’s earnings record,however.

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Social Security is complicated

The rules governing the impact of a working retirement on SocialSecurity can be anything but simple—but with informed professionalguidance, a client can more accurately gauge how one spouse’scontinued earnings will impact current Social Security benefitentitlement.