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Social Security Administration announced a new taxable earnings wage base limit increase for (COLA) Set For 5.9% for 2022

Social Security Administration announced a new taxable earnings wage base limit increase for (COLA) Set For 5.9% for 2022

People who collect Social Security are about to see bigger checks. The cost-of-living adjustment in 2022 will be 5.9%, the Social Security Administration announced October 13, 2021, compared with a COLA increase for 2021 of 1.3%. The bump, which will help beneficiaries keep up with rising costs due to inflation, is the largest increase in about 40 years. Recently, CNBC and the Journal of Accountancy also reported on it as well. 

The adjustment will mean that more than 70 million Americans will see bigger checks. CNBC reported that “the roughly 8 million Americans on Supplemental Security Income, or SSI, will see the change come Dec. 30, while about 64 million getting Social Security will see the increase in January.”  According to some estimates, the 2022 or cost-of-living adjustment will add roughly $92 a month to an average retirement benefit of $1,565 a month. 

Some Key Takeaways: 

  • The Social Security cost-of-living adjustment for 2022 will be 5.9% for 2022.

  • The annual increase will be the highest beneficiaries have seen in about 40 years.

  • In 2021, the cost-of-living adjustment was 1.3%   

  • Will add roughly $92 a month to a person’s average retirement benefit. 

  • The maximum amount of an Individual's taxable earnings in 2022 subject to Social Security tax will increase to $147,000 from $142,800 in 2021

The estimated average monthly benefit for all retired workers will rise to $1,657, up from $1,565.

Jo Ann Jenkins, CEO of AARP, stated that ″the recent announcement of a 5.9% COLA increase, the largest increase in four decades, is crucial for Social Security beneficiaries and their families as they try to keep up with rising costs.” She further stated “the guaranteed benefits provided by Social Security and the COLA increase are more crucial than ever as millions of Americans continue to face the health and economic impacts of the pandemic. Social Security is the largest source of retirement income for most Americans and provides nearly all income (90% or more) for 1 in 4 seniors.”​ Social Security’s benefits are adjusted annually using a specific set of consumer price index data, the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.

SSA announced that the maximum amount of an individual's taxable earnings in 2022 subject to Social Security tax will be $147,000  

Social Security is funded by a payroll tax of 12.4 percent on eligible wages — employees pay 6.2 percent and employers pay the other 6.2 percent (with self-employed workers paying the entire 12.4 percent). Next year, the maximum amount of wage earnings subject to the Social Security tax will increase to $147,000 from $142,800 in 2021.  Paul Bonner, a contributor at The Journal of Accountancy points out that “the wage base limit applies to earnings subject to the tax, known officially as the old age, survivors, and disability insurance (OASDI) tax.”  The money paid in by today's workers goes to cover current benefits, with any excess going into the Social Security Trust Fund.​ Since the OASDI tax rate is 6.2%, an employee with total wages from an employer at or above the maximum in 2022 will pay $9,114 in tax, with the employer paying an equal amount.  

The Medicare hospital insurance tax of 1.45% each for employees and employers has no wage limit and is unchanged for 2022. Tax paying professionals with earned income of more than $200,000 ($250,000 for married couples filing jointly and $125,000 for married taxpayers filing separately) pay an additional hospital insurance tax under Sec. 3103(b)(2) of 0.9% of wages with respect to employment (also unchanged).

The Journal of Accountancy article also mentioned that “self-employed individuals pay self-employment tax equal to the combined OASDI and Medicare taxes for both employees and employers, i.e., 15.3%, up to the OASDI wage base and 2.9% in Medicare taxes on net self-employment income above it, with an offsetting above-the-line income tax deduction of half of the OASDI-equivalent component of self-employment tax.”   

The annual amount that retirees receiving Social Security benefits can earn in the year they reach full retirement age before their benefits are reduced (by $1 for every $3 in earnings over the limit) will be $51,960 for 2022, up from $50,520 in 2021.  

Beneficiaries who are under the full retirement age will be able to earn up to $19,560 in 2022 (an increase from $18,960 in 2021) before their benefits are reduced by $1 for every $2 in excess earnings.

The maximum Social Security benefit for a worker retiring at full retirement age will increase to $3,345 per month in 2022 from $3,148 per month in 2021.

 

Estimated average monthly Social Security benefits before and after the 5.9% cost-of-living adjustment

SSI 2022

Inflation and Medicare Part B Premiums Could Erode the COLA Adjustment  

Another CNBC article points out that people getting Social Security should understand that the COLA isn’t meant for them to necessarily be able to spend more or have a bigger budget— it’s to keep their cost of living the same as prices rise due to inflation. At the moment, prices on things such as rent, gas, utilities and food have gone up due to inflation.  Furthermore, American citizens who are on Medicare or Medicaid will also likely not see a full 5.9% bump because of premiums associated with health care. The AARP article explains that “most Social Security recipients will see their COLA reduced by an increase in the cost of Medicare.

Medicare Part B premiums, which cover physician visits and outpatient medical services, are typically deducted directly from Social Security benefit payments.” Premium hikes for Medicare Part B, for example, are due in November. The latest Medicare trustees report estimates a $10 increase to Part B, raising the monthly rate to $158.50 for 2022 from $148.50. 

Though, a special rule called the hold harmless provision protects people from getting smaller Social Security checks because of Medicaid and Medicare.   

Taxes may increase for people who have other sources of income

If Social Security checks are your only income, there generally won’t be any change in taxes, but, if you’re someone who draws on other retirement savings in addition to Social Security or is working and receiving benefits, part of your checks may become taxable, depending on your other income. Trenda Hackett, the technical tax editor at Thomson Reuters, told CNBC, “taxpayers who receive other sources of income over the threshold amounts in addition to Social Security benefits should prepare to see an increase in their tax bill if their income is expected to be over the base amount.”

Conclusion   

Just because there’s a record adjustment this year doesn’t mean that people on Social Security should count on getting similar increases in the future. And as far a taxes go, to avoid any surprises, it's a good idea to reach out to a professional CPA, now to make sure you know how the adjustment will impact your taxable income. 

If you have any questions, feel free to reach to Sirchia, CPA
for a free consultation on your particular circumstances. 

 


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