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What does 8.7% Social Security COLA for 2023 mean for benefits taxes


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Retirees who rely on Social Security benefits for income will enjoy relief from record-high inflation when 8.7% cost-of-living adjustment rock next year.

But two factors – Medicare Part NO premium size and tax on benefits – how much more can offset that monthly check be in 2023.

The good news is that the standard monthly premium for Medicare Part B, which includes medical and outpatient coverage, is set to 3% down next year, from $170.90 from the current rate of $170.10. Because those premiums are often deducted directly from the benefit check, a lower rate means more beneficiaries could see an increase from a cost of living adjustment, or COLA.

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Here’s a closer look at what to do with finances as the year-end approaches:

However, a higher COLA could push some beneficiaries into a higher tax bracket.

The COLA record high According to Brian Vosberg, a certified financial planner and registered agent who is the president of Vosberg Wealth in Glendora, California, is “great” for retirees, as they struggle with higher rates for everything from rent to food.

“While they are excited to see the increase coming, they don’t really envision what the impact could be from a tax standpoint, and from a tax point of view it will then be gradually reduced to costs,” Vosberg said. theirs in retirement.

How to tax Social Security benefits

Social Security benefits are tax based on formula referred to as “combined” or “temporary” income.

That number is calculated by taking your adjusted gross income and adding up your untaxed interest and half of your Social Security benefits.

Tax on Social Security benefits applies to single taxpayers starting with $25,000 in combined income, and married taxpayers starting with $32,000 in combined income.

Individuals with gross income between $25,000 and $34,000 must pay taxes on up to 50% of their benefits. The same goes for couples with incomes between $32,000 and $44,000.

IRS raises standard income and deduction thresholds for all tax brackets

For individuals with gross income over $34,000 and couples over $44,000, up to 85% of their Social Security benefits can be taxed.

Because these thresholds are not adjusted for wage growth or inflation, over time that has motivated many Social Security beneficiaries to pay taxes on their benefits, according to the report. Center for Retirement Studies at Boston College.

When the subsidy tax was first introduced in 1983, only 8% of households were eligible to pay the benefit tax. By 2021, that number has grown to an estimated 56 percent, according to the Center for Retirement Research. With moderate inflation, that number is forecast 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.” Written Alicia Munnell, director of the Center for Retirement Research and research associate Patrick Hubbard.

How Beneficiary Taxes May Increase in 2023

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According to Joe Elsasser, CFP, founder and president of Covisum, a provider of Social Security claims software, an increase in Social Security earnings next year may not give beneficiaries the ability to the ability to withdraw your retirement money without facing consequences.

For example, with about 7% increase tax bracketBeneficiaries may think they can get an extra 7% out of their individual retirement accounts next year and have the same tax results.

“That’s not the case, because a larger amount Social Security becomes taxable‘ Elsasser said.

However, there may be room for some beneficiaries to increase their retirement withdrawals while remaining tax-free on their benefits, according to Elsasser.

For example, a married couple both over 65 with $35,000 in Social Security benefits this year could receive $23,967 in withdrawals in 2022 and pay no federal income tax, according to the calculations. by Elsar.

Don’t wait to see your CPA before April 15; too late.

Brian Vosberg

Chairman of Vosberg Wealth

In 2023, that couple’s Social Security benefits will increase to $38,045 with COLA, and the amount they withdraw could be as high as $24,793, Elsasser said.

If the couple’s Social Security benefit was $60,000 instead, they could withdraw $18,703 tax-free, which in 2023 would amount to $65,220 in benefits and less than one bit – $18,585 – withdrawable amount.

To be sure, results will vary based on an individual or couple’s own financial situation.

Beneficiaries given the choice of where to withdraw their additional income should reassess that option annually for the best tax results, says Elsasser.

What to do to minimize your tax share?

The goal, experts say, is to determine the right mix of retirement income for your individual situation and keep your gross or gross income under certain limits.

If you have savings in both retirement and other accounts, you can come up with an estimate using tax software and vary the IRA withdrawal amount, says Elsasser.

“But this is definitely the domain of tax-focused financial planners,” says Elsasser.

Whatever your budget, you should find out where that income will come from by January 1, according to Vosberg.

“Don’t wait to see your CPA before April 15; it’s too late,” Vosberg says. “The income you’ve received is quite a bit.”

Beneficiaries who continue with the status quo of retirement withdrawals and bank interest could find themselves paying more tax at the end of next year if they don’t take the initiative, he said.

To minimize your taxes, try withdrawing money from non-taxable sources of income, like a Roth individual retirement account, Vosberg says.

Like Federal Reserve raises interest rates comes into effect, it would be wise to also pay attention to how much interest you can get saveincluding money market accounts and certificates of deposit, can boost your income, he says.

Remember that having a higher income due to a Social Security COLA can also affect how much you pay for medical insuranceVosberg said.

People who haven’t turned 65 and are covered through the Affordable Care Act may see their subsidized credits or premiums drop. People who are on Medicare may have to pay higher co-payments for Medicare Parts B and D.

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