5 Social Security Myths That Could Cost You Money

By Dan Caplinger Markets Fool.com

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Social Security is a complex program, and even though tens of millions of Americans receive benefits under Social Security, few understand it completely. Many myths about Social Security are out there, and they're often misleading enough that they could lead you to make a bad decision that would cost you money. Knowing about these myths in advance will help you create a better strategy for making the most of your Social Security benefits.

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Myth: Getting a big raise in your last year of work can make your Social Security benefits skyrocket

Many pension plans take a look at what you earn during your final few years of work to determine what your monthly pension payment will be after you retire. However, Social Security is different. It looks at an entire work history, taking the 35 top-earning years after adjusting for inflation, and figuring out your monthly average earnings over that long time frame. As a result, a high-earning year to end your career will carry some weight, but it will still be just one out of up to 35 years that the Social Security Administration will consider in determining your final benefit amount.

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Myth: No one has to pay income taxes on their Social Security benefits

Many people don't have to pay federal income tax on what they receive from Social Security, but some unfortunate taxpayers do get tagged by the IRS for a portion of their benefits. The critical question is whether your income exceeds certain threshold limits. To start, take any taxable income you get from sources other than Social Security, such as work income, investment income, IRA or 401(k) distributions, or pension payments. Then add half of your Social Security benefits for the year. If the amount exceeds $25,000 for single filers, or $32,000 for joint filers, you may have to include a portion of your benefits as taxable income for that year.

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Myth: No matter how old you are, working at a job can take away your Social Security benefits

There is, indeed, a provision by which you can forfeit Social Security benefits if you also work, but the provision only applies to those who take benefits before they reach full retirement age. In 2017, those who are younger than full retirement age all year will lose $1 for every $2 they earn above $16,920 for the year. Those who reach full retirement age at some point during 2017 will lose $1 for every $3 in earnings above the much higher threshold of $44,880. However, those who are already at, or above, full retirement age can work as much as they want without losing anything.

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Myth: If you divorce, you'll lose your spousal benefits from Social Security

Divorce can take away your rights to spousal benefits, but only if you don't qualify for spousal or survivor benefits based on your ex-spouse's work record. To qualify, you need to have been married for at least 10 years before divorcing, and you generally must not have remarried. However, one can claim survivor benefits based on an ex-spouse's benefits even if they've remarried, as long as they waited until reaching age 60 or later before remarrying. Moreover, any benefits you claim on an ex-spouse's work record won't affect the benefits that your ex-spouse and any other family members will receive.

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Myth: There's an ideal age for everyone to claim Social Security benefits

You can claim retirement benefits under Social Security anytime between ages 62 and 70, and there's a trade-off in whatever decision you make. Claim earlier, and you'll get smaller monthly payments, but you'll also receive more of them. Claim later, and your payments will be larger, but you'll get fewer of them during your lifetime. There are too many variables for any one answer to apply to everyone, but by knowing the variables involved, you can make a decision that's right for you.

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