Many Americans are unaware that they may be eligible to receive up to $144 back from Social Security. This money represents Social Security contributions that were withheld from your paychecks but were not taxed. If you qualify, claiming this tax credit can provide a nice financial boost.
What is the Social Security tax credit?
The Social Security tax credit, also known as the Windfall Elimination Provision (WEP), is designed to even out Social Security benefits for people who paid into both Social Security and another government pension system during their working years. This applies to people who worked for an employer who did not withhold Social Security taxes from their paychecks for a certain period of time.
For example, federal employees under the Civil Service Retirement System (CSRS) did not pay Social Security taxes on their earnings. The WEP was created to reduce their Social Security benefits since they did not contribute to the system for that period of employment. By claiming the tax credit, you can recoup some of those lost Social Security earnings.
How does the WEP affect your Social Security benefit amount?
If you qualify for the WEP, your monthly Social Security retirement or disability benefit amount will be reduced. The maximum reduction in 2023 is $51 per month. Without the WEP, beneficiaries who also receive a pension from employment not covered by Social Security could receive a windfall because they’d get full Social Security benefits despite not paying into the system for that period of work.
For example, someone who worked in the private sector and qualified for a $600 monthly Social Security benefit who also worked for a period under CSRS and earned a $400 monthly pension would receive $1,000 per month in retirement income from the two sources. The WEP was created to prevent people in this situation from getting inflated Social Security benefits.
Who is eligible for the Social Security tax credit?
You may qualify for the Social Security tax credit if you:
- Paid into Social Security from other employment for at least 30 years
- Are now receiving a pension from a job where you paid Social Security taxes for less than 30 years (such as certain federal, state or local government work)
- Your Social Security benefit amount was reduced because of receiving the pension
The amount of the credit you can recoup depends on the number of years you paid into Social Security versus the number of years you did not pay into the system.
How do you claim the Social Security tax credit?
Claiming the credit is easy – you just need to file Form 1040 and Schedule R with your annual income tax return. The Social Security Administration will send you a Form SSA-1099 each year showing your full retirement benefit and the amount reduced under the WEP if you qualify. You will need this information to complete Schedule R and determine the tax credit.
On Schedule R, you calculate the difference between your monthly benefits before and after the WEP reduction. Multiply this by 12 to get the annual credit amount. The maximum credit in 2023 is $1,728 ($144 per month).
The credit is treated like any other tax payment, such as federal tax withheld from a paycheck. It can be used to reduce the income tax you owe for the year or increase your income tax refund. Any unused credit can be carried forward to future tax years.
What other retirement benefits are impacted by the WEP?
In addition to Social Security benefits, the WEP may also reduce your benefits from these programs:
- Social Security equivalent benefit programs for railroad workers
- Pensions for federal employees under CSRS
- Pensions for state and local government employees not covered by Social Security
The reduction calculation and eligibility for the tax credit is very similar for these plans. If you paid into one of these pension systems instead of Social Security for a period of your career, review your annual benefit statements carefully to see if you are affected.
Can you ever get full Social Security benefits?
In some cases, you may qualify for full Social Security benefits if you have 30 or more years of substantial earnings where you paid Social Security taxes. Each year of earnings over $25,575 (in 2023) counts as one year towards the 30 years. If you have 30 years, the WEP no longer applies and your benefit amount increases to the full calculated benefit.
You can request that Social Security review your earnings record to see if you qualify for the 30-year threshold. Pay stubs and W-2s may be required to fully document your earnings if your employer did not properly report them to Social Security over the years.
How are spousal or survivor benefits affected by the WEP?
Spousal or survivor benefits are also reduced if the primary worker is subject to the WEP. The reduction to spousal benefits can be up to $51 per month in 2023, the same as the individual worker reduction. The rules for the tax credit also apply.
Are there any proposals to change the WEP?
There are several proposals to modify or eliminate the WEP entirely. Some argue it is unfair to reduce Social Security benefits for people who were not allowed to pay into the system during their working years. There are also proposals to create a more proportional reduction based on the number of years worked in Social Security-covered employment.
However, opponents argue that removing the WEP would reintroduce the windfall scenario it was designed to prevent. There are also administrative complexities in calculating a proportional reduction for each worker.
For now, the WEP remains in effect as a way to even out benefits for people with split careers between Social Security-covered and non-covered employment. Claiming the up to $144 tax credit can help offset some of the reduction.
Conclusion
The Social Security tax credit allows certain individuals who paid into both a pension system and Social Security over their careers to recoup some of their lost Social Security earnings. Understanding the eligibility requirements and claiming process allows affected individuals to maximize their retirement benefits. Most experts recommend applying for the credit each year you qualify to get the full amount back.
While the Social Security Administration determines your eligibility and reduction amount, claiming the actual tax credit is easy by filing Schedule R with your annual tax return. The credit can lower your income taxes owed or boost your refund. Ongoing proposals may modify or eliminate the WEP in the future, but the credit remains beneficial under the current rules.
Consulting with a tax preparer or financial advisor can help you determine if you are eligible for the Social Security tax credit and ensure you receive all the retirement benefits you deserve. Careful planning and claiming available credits like this one allows you to stretch your retirement income further.
| Year | Maximum Social Security Tax Credit |
|---|---|
| 2023 | $1,728 |
| 2022 | $1,704 |
| 2021 | $1,656 |
| 2020 | $1,620 |
The maximum credit amount increases slightly each year along with other Social Security cost of living adjustments. Ensure you are receiving the full credit you deserve each year you qualify by filing Schedule R.
With some planning, you can take action to get the most out of your Social Security benefits. Understanding programs like the Social Security tax credit empowers you to make sound decisions to maximize your income in retirement.
