Both the Supplemental Security Income and Social Security benefits are set to rise significantly benefitting millions of Americans. The federal government has announced an 8.7% cost-of-living-adjustment (COLA) that will begin with benefits payable to over 65 M Social Security beneficiaries in January next. The significant rise in payments assumes importance in the absence of any form of fresh federal stimulus check-in in 2022 and 2023.
Over 7 million SSI beneficiaries will receive increased payments on December 30, 2022. And some people receive both Social Security stimulus checks and SSI benefits.
The maximum earnings possible will increase to $160.200 but is subject to the Social Security tax. The earning limit for workers who are younger than full retirement age will increase to $21,240. A dollar has been deducted from benefits from each of the two dollars earned over $21,240.
The earning limit for beneficiaries who have reached their full retirement age in 2023 is set to increase to $56,520. Again one dollar is deducted from benefits for each $3 earned over $56,520 till the worker reaches full retirement.
There is no limit on the earnings for workers who reach the full retirement age of more for the full year. Social Security recipients are getting the biggest COLA adjustment in 4 decades and experts have advised people to go in for some tactical tax planning.
Retirees who depend on Social Security remunerations for their income will profit from the record inflation that has reached a four-decade high, even crossing the 9% mark to touch 9.1% in June 2022. It was the highest since November 1981.
But two other factors may offset the amount of the monthly stimulus checks for 2023 and they are the taxes on individual and joint benefits and the size of the Medicare Part B premiums.
The positive sign is that standard premiums for Medicare P-B every month which includes medical coverage and outpatient are expected to slide by 3% in 2023, and will come down from $170.1 to $164.9.
As these premiums are normally deducted straight from the benefit stimulus checks, a lowering of the rate will enable most beneficiaries to receive the rise from the COLA.
But a higher COLA could force beneficiaries into a upper tax bracket than at present.
The record increase in cost-of-living-adjustment is great news for retirees who are one of the sections most affected by the rise in all round prices that has affected everything from groceries to gasoline, say financial planners and enrolled agents.
But they say that the increase for 2023 is exciting and significant. But beneficiaries need to envision the possible impact from the standpoint of income tax. And this tax factor can trickle down to encompass other expenses post-retirement.
Calculating The Social Security Stimulus Checks
The income tax on Social Security remunerations is calculated on a formula referred to as a provisional or combined income. This calculation is done by taking the AGI and adding back non-taxable interest and also 50% of the social benefits.
The income tax on the Social benefits applies to single tax filers that start with $25,000 joint benefits, and to married taxpayers that start with a combined income of $32,000.
Individuals who are in the range of $25,000 to $34,000 in shared profits pay taxes on half of their total benefits. This same rule is applicable for couples with earnings ranging from $32,000 to $44,000.
For people with over $34,000 as joint income and for couples with more than $44,000, up to 85% of the amount may be taxable.
As the threshold isn’t adjusted for the growth of wages or inflation, with time this has led to more beneficiaries paying taxes on benefits. This was revealed by the Center for Retirement Research, Boston College.
At the time tax on benefits first came in 1983, the number of families paying taxes was a minuscule 8%. This has gone up to an astounding 56% in 2021 says the CRR. And with normal inflation, this figure was expected to climb up in 2030 to 58%.
But with a faster rise in inflation, Social Security checks will rise faster in terms of nominal dollars but it will mean that additional families will have to pay taxes on extra benefits. This will further reduce their net benefit.
The increase in income from Social Security in 2023 will not allow beneficiaries to increase their retirement drawings unless they end up paying more taxes.
Minimizing The Tax On Social Security Payments
With an approximate increase of 7% in tax ranges, beneficiaries would be mistaken if they think that they can withdraw 7% extra from individual retirement accounts in 2023, and pay identical tax. This will not be the case as a bigger chunk of the Social Security stimulus check becomes taxable.
But beneficiaries may still have some wiggle room to increase the sum of their retirement benefits while not incurring additional taxes. For instance, a married couple, both above sixty-five years and with social benefits of $35,000 may withdraw $23,967 this year and still not pay any income tax.
But in 22023 that benefit from Social Security would increase to $38,045 with the cost-of-living-adjustment. The amount that they can withdraw without inviting taxes in this case goes up to $24,793 in what they can withdraw without attracting income tax.
And if the benefits for the couple were $60,000 they would withdraw $18,703 without being taxed. But in 2023 the benefit would rise to $65,220 and with slightly fewer possible withdrawals of $18,585.
The results may vary slightly based on the individual or the couple’s financial condition. Beneficiaries who can choose where they can withdraw supplemental income can make a revaluation each year and enjoy the best possible results.
Experts advise setting a goal of identifying a blend of retirement income that works for each individual’s position and keeps the total income under a limit. For those who have money saved in both retirement accounts and other accounts, an estimate can be arrived at by using software and by changing the amount withdrawn under IRA.