One of the challenges of living on a fixed income in retirement is that any increase in taxes or consumer prices can have a major impact, no matter how small those increases are. That’s especially true when you depend heavily on Social Security benefits, which rarely provide enough income to cover anything beyond the bare essentials.
Although the Social Security Administration tries to account for inflation with a yearly cost-of-living adjustment (COLA), the increase doesn’t always keep up with actual inflation. In 2022, for example, the COLA was 5.9% — but the inflation rate spent all year at 7% or higher.
Inflation also play a part in the amount of taxes both retired and working Americans pay. Here’s a look at six ways inflation might hit Social Security benefits and taxes in 2024.
Less Spending Power
This has been an ongoing struggle for Social Security recipients — the inability of annual COLAs to effectively battle inflation. According to research released earlier this year by The Senior Citizens League (TSCL), average benefits fell short of inflation by roughly $1,054 from January 2021 to December of 2022. Average benefits have recovered part of that because of the high 8.7% COLA, but not nearly all of it.
One of the main problems is that the formula used to determine the yearly COLA underestimates healthcare costs, according to TSCL, a non-partisan seniors advocacy group. The index used to determine the annual COLA is the Consumer Price Index for Urban Wage Earners, and Clerical Workers (CPI-W), which assumes consumers spend about 7% of their household budget on healthcare. But according to TSCL’s latest Senior Survey, most respondents said they spend at least 16% of their income on healthcare.
Lower Monthly Payment Increase
Based on the most recent inflation figures, the 2024 COLA will likely be 3.2%, which would raise the average monthly retiree benefit of $1,790 by $57.30. That represents a significant drop from this year’s average monthly boost of $146. The official 2024 cost-of-living adjustment is expected to be announced on Oct. 12, when the September inflation numbers come out.
Higher Tax Bracket
The 2023 COLA pushed some beneficiaries into a higher tax bracket, which could translate into higher taxes when they file their 2023 returns next year. You might owe taxes on a portion of your Social Security benefits when your combined income is greater than $25,000 for single filers or $32,000 for couples filing jointly. Combined income, also known as provisional income, is the total of half of your Social Security benefits, your tax-exempt interest and other non-Social Security items (such as jobs or investments) that make up your adjusted gross income.
Individuals with combined income above $25,000 and joint filers above $32,000 have up to 50% of their Social Security income taxed. For individuals with combined income above $34,000 and joint filers above $44,000, up to 85% of Social Security is taxed.
Although Social Security benefits are adjusted for inflation each year, the income tax thresholds for recipients have not changed since benefits were first taxed in 1984. This means that whenever benefits are increased, more seniors are exposed to income taxes on Social Security.
Medicare Premiums Will Rise
In an annual report released earlier this year, the Medicare Trustees forecast that monthly Part B premiums will increase from $164.90 in 2023 to $174.80 in 2024. That estimate doesn’t include any “significant new costs” that come up after the estimate is released, according to TSCL. One of those costs could be Medicare’s coverage for another new Alzheimer’s drug, Leqembi, which is expected to cost $26,000 a year without insurance.
Higher Earnings Test (Maybe)
When you begin receiving Social Security retirement benefits, the SSA considers you retired. You can still get Social Security benefits and earn outside income, but there’s a limit to how much you can earn and still receive full benefits. That limit is reassessed every year, and it could change in 2024 as well.
If you are under full retirement age for the entire year, the SSA deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2023, the limit is $21,240. In the year you reach full retirement age, the SSA deduct $1 in benefits for every $3 you earn above a different limit. In 2023, this limit on your earnings is $56,520.
Increase in Payroll Tax Threshold
Workers in 2024 are likely to see a change in the income threshold for wages subject to Social Security taxes. In 2023, you have to pay taxes on all wages up to $160,200, which was up from $147,000 in 2022. This is not unusual — the SSA has hiked the income threshold every year since 2016 and in all but three years since 1972.
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