Social Security will undergo significant changes in 2022. As a result of a large Cost of Living Adjustment, benefits had increased by 5.9%.
In order to qualify for Social Security, an individual must keep up with earning a larger amount of work credits. Though, a higher maximum income is subject to Social Security taxation. As a result, seniors can earn more money by working without having to worry about their Social Security benefits being affected.
As wages and costs increase, Social Security is making changes. It adjusts most key formulas for inflation and wage growth to guarantee that retirees maintain their purchasing power and contribute the right amount to Social Security.
However, one factor/number does not increase. Also, it doesn’t increase every year, which could leave retirees with an ever-increasing bill. Here is what this is all about.
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This Social Security Number is not Subject to Change
Most of the Social Security Administration’s financial metrics are adjusted to keep up with inflation and wage growth, but there are no changes in the rules concerning the amount of income required to pass prior to when Social Security benefits become taxable.
A single taxpayer with a provisional income exceeding $25,000 or a married couple filing jointly with a provisional income exceeding $32,000 could be subject to taxation on part of their benefits. Moreso, Social Security benefits are subject to tax on between 50% and 85%. The thresholds of $25,000 and $32,000 won’t change in 2022 — nor have they changed in the past.
Social Security benefits are taxable based on a fixed set and are not automatically adjusted each year based on a set formula. This will be changed only if Congress changes the legal framework so that benefits are taxable at a higher income level. The attempt to do that has not been made — and it is unlikely to happen in the near future.
What Makes this a Big Issue?
The income thresholds that still apply today were set by Congress in 1984 when Social Security benefits first became taxable. Income subject to these rules includes half your Social Security benefit, all taxable income, as well as some non-taxable income. In the past, only about 10% of people ended up owing the IRS taxes on their benefits due to the income limits.
Despite rising wages and changing costs of living and even as retirees received larger Social Security checks, the income thresholds did not change due to indexed income levels.
Consequently, more people are now earning at least $25,000 or $32,000 each year. In the end, more than half of all retirees lose some of their benefits to Uncle Sam.
The retirement community may see a big increase in income next year, and even more, people may find themselves facing tax bills, with the Cost of Living Adjustment at 5.9%.
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Those on fixed incomes, whose raises may not cover rapidly increasing prices, may face a big problem too.
At some point, seniors must know when their benefits become taxable — and, if they cross the threshold, they must budget for this additional expense.
