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Retirees who rely on Social Security benefits for income 8.7% cost of living adjustment coming into effect next year.
But two factors – Size of Medicare Part B premiums and benefit taxes – In 2023, this could offset how big the monthly checks will be.
The good news is that the standard monthly premium for Medicare Part B, which covers outpatient and medical coverage, is set to: will decrease by 3% next year, from the current rate of $170.10 to $164.90. Because these premiums are often deducted directly from benefit checks, a lower rate would allow more beneficiaries to see the increase from the cost of living adjustment or COLA.
However, higher COLA may cause some beneficiaries to hit a higher tax bracket.
this record high COLA It’s “great” for retirees as they grapple with higher prices on everything from rent to food to gas, according to Brian Vosberg, a certified financial planner and registered agent who is president of Vosberg Wealth in Glendora, California.
“While they’re excited to see the increase coming, they don’t really envision what the tax impact could be, and then they drip into their other expenses in retirement in terms of taxes,” Vosberg said. Said.
How are Social Security benefits taxed?
Social Security benefits taxed according to the formula known as “combined” or “temporary” income.
This is calculated by taking your adjusted gross income and adding the non-taxable interest and half of your Social Security benefits.
Taxes on Social Security Benefits It applies to single taxpayers with combined income starting at $25,000 and married taxpayers with combined income starting at $32,000.
Individuals with a combined income of $25,000 to $34,000 pay tax up to 50% of their benefits. The same goes for married couples who earn between $32,000 and $44,000.
For individuals with a total income of more than $34,000 and couples with a combined income of more than $44,000, up to 85% of Social Security benefits may be taxed.
Since thresholds were not adjusted for wage growth or inflation, over time it forced more Social Security beneficiaries to pay taxes on their benefits. Center for Retirement Studies at Boston College.
When benefits taxes were first introduced in 1983, only 8% of eligible families paid taxes on benefits. According to the Center for Retirement Research, by 2021 that figure has risen to an estimated 56%. With moderate inflation, this is expected to rise to 58% by 2030.
“If inflation rises faster, Social Security benefits will be even higher in nominal dollars and more families will pay for more benefits — further reducing the net benefit.” Wrote Alicia Munnell, retired Research Center director, and Patrick Hubbard, research fellow.
How can beneficiaries’ taxes increase in 2023?
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Increases in Social Security income next year may not give beneficiaries the ability to withdraw their retirement without facing tax consequences, according to Joe Elsasser, founder and president of Covisum, a CFP and Social Security claims software provider.
For example, with roughly 7% increase in tax bracketsbeneficiaries may think that they can withdraw 7% more from their individual retirement accounts next year and have the same tax consequences.
“This is not the case, because in larger quantities Social Security becomes taxablesaid Elsaser.
However, according to Elsasser, some beneficiaries may not incur a tax liability on their benefits, even though they increase their retirement withdrawals.
For example, according to Elsasser’s calculations, a married couple who are both over 65 and have $35,000 in Social Security benefits this year could receive $23,967 withdrawals in 2022 and pay no federal income tax.
Don’t wait to see your CPA until April 15; very late.
Brian Vosberg
President of Vosberg Wealth
Elsasser said that in 2023, this couple’s Social Security benefits will rise to $38,045 by COLA, and the amount they withdraw could be up to $24,793.
If the couple’s Social Security benefits were $60,000 instead, then they could have withdrawn $18,703 tax-free, which would add up to $65,220 in 2023 and slightly less in possible withdrawals — $18,585.
Results will vary based on the unique financial situation of an individual or couple.
Elsasser said that beneficiaries who have the opportunity to choose where to withdraw their additional income should reassess that choice each year to achieve the best tax results.
What should you do to minimize your tax bites?
Experts say the goal is to determine a retirement income mix that fits your personal situation and keeps your total or combined income under certain limits.
If you have money saved in both retirement and other accounts, you can make an estimate using tax software and changing the amount of your IRA withdrawals, Elsasser said.
“But that’s definitely the domain of tax-focused financial planners,” Elsasser said. Said.
Whatever your budget, you should be shooting by January to find out where that income will come from. 1, according to Vosberg.
“Don’t wait until April 15 to see your CPA; it’s too late now,” Vosberg said. “Your income is pretty much constant anyway.”
Beneficiaries who continue the status quo of retirement withdrawals and bank interest may find themselves paying more taxes by the end of next year if they are not proactive, he said.
To minimize your tax deduction, try withdrawing money from non-taxable income sources such as Roth individual retirement accounts, Vosberg said.
Aspect Federal Reserve rate hikes It’s also wise to be mindful of how much attention you might get if it goes into effect. saving to moneyHe said it can increase your income, including money market accounts and certificates of deposit.
Keep in mind that having a higher income due to the Social Security COLA can also affect how much you pay. health insurancesaid Vosberg.
Those who have not yet turned 65 and are covered by Affordable Care Act insurance may see their subsidy or premium credits drop. Those on Medicare may have higher surcharges for Medicare Parts B and D.
