As you probably had heard, Social Security announced the cost-of-living adjustment (COLA) for 2023. We recently received updates on a decrease in Medicare Part B premiums for 2023 as well.
While both of these updates are quite welcome, there are some planning items that retirees should address.
Social Security check increases:
As mentioned earlier, the Social Security Administration announced the 2023 inflation adjustments on current benefit checks, which will come in at an 8.7% increase. This benefit affects about 70 million Americans. So that's a big deal. 1
To put this in perspective, we should look at a brief history of cost-of-living adjustments over the last few years:1
2023 -- 8.7%
2022 -- 5.9%
2021 -- 1.3%
2020 -- 1.6%
2019 -- 2.8%
2018 -- 2.0%
2017 -- 0.3%
2016 -- 0.0%
The 2023 adjustment is the largest COLA bump we have seen since 1981. But look how many years there were with only a 2% adjustment or less.
The average Social Security retiree benefit will increase by $146 per month, to $1,827 in 2023, from $1,681 in 2022.2
You can verify your new Social Security check amount off your statement which will be posted in early December.
Important tax action item!
While your Social Security check is increasing, the brackets that determine how much of your check is taxed are NOT increasing. That means, for many individuals, you might be pushed from none of your Social Security being subject to taxes, to now 50% of your Social Security check being subject to taxes. And if you currently see only half of your Social Security check is subject to taxes, you may now jump to 85% of your check being subject to taxes.
Provisional Income tax amounts:3
For married fillers:
- 0% of SSI taxable -- $0-$32,000
- 50% of SSI taxable -- $32,00-$44,000
- 85% of SSI taxable -- $44,000+
For single filers:
- 0% of SSI taxable -- $0-25,000
- 50% of SSI taxable -- $25,000-$34,000
- 85% of SSI taxable -- $34,000+
It's important to note Social Security income brackets are a cliff. You go just $1 over that bracket and you will jump from one percentage cap to the next. These brackets are not progressive like we see in our federal brackets, where you "fill up" one bracket before you move to the next marginal bracket.
With higher Social Security income, you may need to adjust how much tax withholdings you are electing.
Social Security taxable earnings increase
Another update that was released is that the Social Security Administration has increased the amount of earned income in which is subject to Social Security taxes. Workers currently pay in 7.65% is employed, or a full 15.30% if self-employed, to Social Security. 4
That 7.65% is broken up between 6.20% to the Social Security portion (OASDI) and 1.45% to the Medicare portion (HI).
That 6.2% tax is currently capped at $147,000; so the first $147,000 of income is subject to Social Security taxes, and that $147,001st dollar is not. That limit for 2023 is increasing by $13,200 to $160,200. 5
So starting next year, workers must pay 6.2% for the $160,200 of income.
Social Security Earning Test Exemption increased
Lastly, I want to share that there was an increase in the number of earnings allowed while collecting Social Security.
As you may know, IF you collect Social Security before your Full Retirement Age (FRA), AND still work, the Social Security system will withhold $1 for every $2 you earn. That withholding is up to $19,560/year until you reach your Full Retirement Age, or $51,960 the year an individual reached full retirement age. This allowed earning limit has increased to $21,240/year ($1,770/mo.) under full retirement age of $56,520/year (4,710/mo.). 6
This limit ONLY applied to earned income; money you get from a J.O.B. This does not apply to passive investment income, pension income, or other unearned income.
2. CNBC.com, October 13, 2022