AARP published a useful Q&A as part of a series on tax-issue for those approaching retirement age. This particular article helps the reader identify which payments are classified as “Special Payments” under the current tax code and how they must be reported to the IRS.
Here’s a definition of “Special Payments” from AARP:
Special payments are payments you receive after you retire — for work you did while you were still employed. Usually, those payments will not affect your Social Security benefit. Such payments include severance pay, bonuses, accumulated sick pay, back pay or vacation pay, sales commissions, or other forms of compensation earned before you retired.
If you receive special payments, you should notify Social Security so that the agency will not count those payments as postretirement earnings. Otherwise, you may run into the earnings limit and temporarily lose some of your benefits. Or you may receive a letter from Social Security asking you to repay money you’ve received.
It is a good idea, when you retire, to ask your employer for a letter stating the various payments you are receiving for work previously done or benefits accumulated while you were employed. The letter should go to Social Security as proof of your special payments.
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