When are Social Security checks potentially loans and not benefits? Why, when you have "excess earnings" of course. In today's economy, many senior citizens still work during their "retirement" either because they want to or, all too often, because they must to make ends meet. Retirees who want to work as well as collect social security retirement benefits must plan their compensation carefully if they want to avoid losing some or all of their social security benefits.

In order to collect social security "old age" benefits, you must be "retired." Congress has reasoned that if you earn more than a specified amount, you are not "retired" and, therefore, are subject to having some or all of your benefits eliminated. Congress does allow you some earnings before your benefits are jeopardized.

The amount of allowable earnings depends on your age. If you are over 65, there is no limit on the amount you may earn and still collect your full benefit. If you are at least 62, but younger than 65, you may earn up to $12,480 in 2006 before your benefits are affected. The earnings limit is adjusted each year for inflation. If you earn in excess of the limit, you must repay some or, potentially, all of the benefits you receive. For every $2 you earn over the $12,480 limit, you must give up $1 of benefits.

A special rule applies in the year in which you retire. In the initial retirement year, no matter how much is earned for the year, no benefits will be lost for any month in which you earn $1,040 (1/12 of $12,480) or less.

For purposes of the retirement test, "earnings" are defined as "wages" earned as an employee or the "net earnings" of a self-employed person. The earnings must result from work performed after retirement. "In kind" payments of goods or services in exchange for work are considered earnings. Retirement plan distributions, rents, capital gains, interest, dividends and other investment-related income do not count as "earnings" for this purpose. You are required to report estimated earnings in excess of the limits. Benefits are then adjusted to reflect the amount owed, based on the estimate. Actual earnings figures should be reported by April 15 of the following year. Further adjustments may then be made based on actual results.

An example will illustrate how Social Security benefits are reduced when a retiree has “excess earnings.” Mr. Baker is a 63 year old retired carpenter who receives $500 per month in social security benefits. During 2006 Mr. Baker earns a net of $14,000 for some cabinets he makes and sells. Mr. Baker's Social Security benefit will be reduced by $760 ((14,000 –12,480)/2).

This brief article is no substitute for a careful consideration of your unique personal situation. Before making any significant retirement planning or tax strategy, consult your financial planner, attorney or tax advisor, as appropriate.