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Will the Social Security Earnings Penalty Affect Me?

What are the "special payments" I have to report?

En español |  Q. I plan to take my Social Security at age 62. My husband and I have a monthly income of about $5,000 from rental properties. Since we file jointly, will my Social Security benefits be affected by this income?

Q. Is the money I collected from a lawsuit (car accident) settlement counted toward the $14,160 I can earn before Social Security reductions?

See also: 10 things you need to know about Social Security.

A. The short answer to both questions is no. Here are the reasons why.

Social Security has a rule called the "earnings test," which can affect the benefits that some retirees receive when they continue to work after signing up for retirement benefits.

Earnings tests apply to people who are between the age of 62 and full retirement age (now 66 for people born between 1943 and 1954).

For 2011, the rules say that until the start of the year when you reach full retirement age, you're allowed to earn up to $14,160 before you face a temporary loss of benefits. For every $2 that you earn above $14,160, Social Security will withhold $1 in benefits.

These "lost" benefits eventually are returned after you reach full retirement age. At that time, Social Security will review your earnings record, and will increase the benefit to account for all months in which a full benefit was not paid because of earnings from work.

However, the key fact about the earnings test is this: When Social Security looks at your income, it counts only earnings you made as an employee. It will also count any net earnings from self-employment.

But that's not the end of the story. The Social Security Handbook lists various other kinds of income that count for the earnings test. They include such items as "all pay for occasional and regular bonuses" and "all pay for incentive, suggestion and outstanding work awards."

But, importantly, Social Security will not count other kinds of income, such as income from rental properties or lawsuits. Also exempted are inheritance payments, pensions, investment income, IRA distributions and interest.

When the year in which you'll reach full retirement age arrives, there's one more wrinkle on the reductions, a new formula: The rules for 2011 say that $1 in benefits will be deducted for every $3 in earnings above the limit of $37,680.

The good news is that your worries about what counts and doesn't count end when you reach the month of full retirement age. After that, you can earn as much as you want, with no benefit reductions.

For important details about earnings test rules, read Chapter 18, Sections 1811 and 1812 in the Social Security Handbook.

Next: What exactly are special payments? >>

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