Mr. and Mrs. Kowalski went to their accountant to file their taxes for 2018. Mr. Jan works and earns about $60,000 a year, and Mrs. Maria makes an extra $25,000. On top of that, they have a few hundred dollars of investment income. Mr. Jan recently celebrated his 66th birthday, and Mrs. Maria is two years younger. They plan to work for two more years, but they are considering collecting Social Security, because Jan is entitled to a retirement benefit of $1,700 a month and his wife to $1,050. Having the chance to talk with a professional, they asked him what their tax situation would look like if they started taking their benefits. The accountant said that Social Security benefits are not taxed, so they would not change anything in their taxes, and that the IRS knows nothing about them. The Kowalskis asked whether continuing to work would reduce their benefits. The accountant said no, because one has nothing to do with the other. Social Security is free money that you have to take because you are entitled to it, and if you don’t take it, you lose it.
I am afraid that not a single statement the accountant made was true. Let us look at the matter and the numbers closely.
Does the IRS Know About Your Benefits?
Of course it does. Every January, the Social Security Administration (SSA) sends beneficiaries Form SSA-1099, summarizing the year’s benefits, Medicare deductions and any federal tax withheld. The same form is sent to the IRS.
In the United States, all payers are required to report the payments they make to the IRS. Banks, mutual funds and brokerage firms inform their customers and the IRS about interest paid (on Form 1099-INT), dividends (1099-DIV), and so on. Employers send out W-2 forms. This allows the IRS to check whether all taxes have been paid.
When There Is No Tax
As it happens, Social Security retirement and disability benefits are taxable, but the rules protect people with modest incomes. It is a fact that a large share of Americans pay no federal income tax, and many seniors are among them. Here is why.
Each of us has a tax-free amount equal to the standard deduction, which in 2026 is $16,100 for a single person and $32,200 for a married couple. The tax-free amount is higher for people aged 65 and older: $18,150 for a single person and $35,500 for a married couple in which both spouses have turned 65. This means you can earn an amount equal to the standard deduction without owing tax and without filing a tax return. In addition, in 2025–2028, people aged 65 and older can deduct an additional amount of up to $6,000 (a married couple – up to $12,000 if both qualify); this break phases out with modified income above $75,000 ($150,000 for married couples). This additional break lowers your tax, but it does not raise the threshold at which you must file a tax return. It is worth filing only to get a refund of tax withheld or to claim the Earned Income Credit (if you have earned income). Self-employed people are treated differently.
When we earn more than the tax-free amount, we begin to owe tax on our taxable income: in 2026 – 10 percent on income up to $24,800 a year for married couples, 12 percent on amounts between $24,801 and $100,800, then 22, 24, 32, 35 and 37 percent for the wealthiest.
How Much Tax on Your Benefits?
For retirees, a different test begins to apply.
Social Security retirement or disability benefits are not taxed for seniors with moderate incomes, that is, those whose so-called “provisional” income – half of their benefits plus all other income – does not exceed $32,000 for a married couple or $25,000 for a single person. Above that amount, up to half of the benefits may be taxable. When provisional income exceeds $44,000 (for married couples) or $34,000 (for single people), up to 85 percent of the benefits are taxable.
The conclusion: Starting to collect benefits can completely change the tax situation of people who continue to work. Seniors whose other income fits within the tax-free amount may start paying taxes once their benefits are added – and for married couples this happens sooner than for single people.
Why is there such a disparity between married couples and single people? Because the 25/34 and 32/44 thousand-dollar thresholds are not indexed for inflation; they were set long ago, when the tax-free amounts were much lower.
How Much Tax for the Kowalskis
Since Jan earned $60,000 and Maria $25,000, and they received a few hundred dollars of bank interest and mutual fund dividends, their taxes for 2018 came to about $6,670.
If Jan’s $20,400 in retirement benefits and Maria’s $12,600 were added to that, a significant part of their benefits would be taxed. This means that collecting benefits would raise the Kowalskis’ taxes by about $4,500, as calculated by my TurboTax program. State taxes would come on top of that. (This example is calculated under the rules for 2018 – today the brackets and deductions are higher, so the amounts would be different, but the mechanism remains the same.)
The conclusion: Social Security retirement or disability benefits are taxed at higher incomes. If someone who is working starts taking benefits, a significant part of them may be eaten up by taxes. (See the book “Ubezpieczenie społeczne Social Security” (“Social Security”)).
Will Earnings Reduce Your Social Security Benefits?
Let us look at the accountant’s statement that earnings have no effect on the amount of retirement or disability benefits you collect. True, but only for people who have reached full retirement age. Mrs. Maria is younger, so the earnings limit applies to her.
Retirees below full retirement age, which is 66 for people born between 1943 and 1954 and gradually rises to 67 for those born in 1960 and later, are penalized for their hard work. A dollar is withheld from their benefits for every two dollars earned above the limit, which is $24,480 in 2026 and $25,560 in 2027 (in 2018 it was $17,040). We are not talking about taxes here, but about a reduction in benefits.
In the year in which a senior reaches full retirement age, collects benefits and works for pay, a different limit applies. He or she will then lose a dollar for every three dollars earned above a limit of $65,160 in 2026 and $67,920 in 2027 ($45,360 in 2018). This penalty is lifted in the month in which you reach full retirement age.
Since Mrs. Maria is 64 and earns $25,000 – eight thousand dollars above the limit at the time – her benefits would be reduced by about four thousand.
And let us not forget that Mrs. Maria would be taking early retirement benefits, which would be lower than full benefits. It pays to wait until full retirement age to get 100 percent.
Do You Lose Money When You Delay Retirement?
A worker who delays retirement loses current income but gains in the long run, because he continues to pay Social Security taxes, and after reaching full retirement age his benefit grows by 8 percent a year (up to age 70). And the larger his benefit, the larger his wife’s spousal benefit, and later her survivor (widow’s) benefit.
Statisticians calculate that if you wait until 66 instead of taking the earliest retirement benefits at 62, your “break-even point” is age 77–78. In other words, you come out ahead by delaying the decision, provided you live longer. The “break-even point” rises the longer you wait, and for a 70-year-old it is 82 compared with a 66-year-old. If you are sickly, it is worth taking benefits earlier, and if you are as strong as an oak and come from a long-lived family – don’t rush too much.
Conclusion
By starting to collect their benefits, the working Kowalskis would receive an additional $33,000 a year, but they would lose about a quarter of it to federal and state taxes. In addition, the losses caused by the reduction in Maria’s early retirement benefits and by giving up the 8% increase in Jan’s benefit could grow to anywhere from ten-plus to several tens of thousands of dollars, depending on the circumstances and how long they live.
Once the Kowalskis learned the facts, they decided to put their plans on hold and apply for Social Security benefits only when they actually retire. They also changed accountants.
Updated October 2026.
