As a retiree depending on Social Security benefits, 2024 will bring about some adjustments. Anticipate a benefit increase to account for inflation. However, the extent of this additional income hinges on the amount allocated for Medicare Part B premiums and any tax withholdings from your payments. Explore the following four factors that will shape the amount of your Social Security benefits in the upcoming year.
Starting in January, Social Security benefits will witness a 3.2% rise, reflecting the annual cost-of-living adjustment. The Social Security Administration notes that this adjustment will translate to an average monthly increase of over $50 for retirement benefits. Compared to the 8.7% COLA implemented in 2023, which led to an average boost exceeding $140 per month, the 3.2% increase is considerably more modest, as reported by the Social Security Administration upon the announcement of the previous adjustment.
A 3.2% increase in cost-of-living Social Security adjustment
In 2024, the maximum benefit for a retired worker claiming at full retirement age will climb to $3,822 per month, marking an increase from $3,627 per month in 2023. According to the Social Security Administration, the average benefit for all retired workers will be $1,907 in 2024, reflecting a rise from $1,848 in 2023.
An influential factor determining beneficiaries’ total income is the Medicare Part B premium, typically deducted directly from their Social Security checks.
Medicare Part B functions as medical insurance, covering expenses related to doctor and other provider services, outpatient care, home health care, durable medical equipment, and certain preventive services. In 2024, standard monthly premiums are set to increase by $9.80, reaching $174.70, compared to $164.90 per month in 2023.
Certified financial planner Tim Steffen, the Director of Advanced Planning at financial services company Baird, notes that Medicare Part B premiums are generally not adjustable, except in specific circumstances. According to Steffen, you can appeal your Medicare premium if a significant change in your situation has occurred since 2022, such as a divorce, the death of a spouse, the loss of a pension, or the commencement of retirement.
If you opt for Social Security between the ages of 62 and your full retirement age, your benefits will be reduced for early commencement. Additionally, if you continue working and earn above a specific threshold, you may encounter the retirement earnings test. For the year 2024, the earnings exempt from the retirement earnings test will increase to $22,320, up from $21,240 in 2023. For every $2 in earnings surpassing this limit, $1 in benefits will be withheld.
The positive aspect is that the withheld benefits are later factored into your monthly benefits once you reach full retirement age.
It’s crucial to note that there exists a distinct earnings test threshold for the year you attain full retirement age.
In 2024, this threshold will rise to $59,520 for the months leading up to your full retirement age, compared to $56,520 in 2023. During the year you achieve full retirement age, $1 in benefits is withheld for every $3 in earnings exceeding the limit. Consideration of the earnings test is pivotal when making decisions about claiming retirement benefits early, as emphasized by Joe Elsasser, a Certified Financial Planner (CFP) and president of Covisum, a provider of Social Security claiming software.
Elsasser notes that the elevated threshold, approaching $60,000, for the year you reach full retirement age offers a unique opportunity.
Illustratively, if your full retirement age falls in July, earning approximately $10,000 per month before your birthday could exempt you from the earnings test if you commence benefits on January 1st.
Taxation of benefit income
The tax rate on this income is determined by your combined income, calculated by adding half of your benefits to your adjusted gross income and nontaxable interest. For individual tax filers, if your combined income falls between $25,000 and $34,000, or for married couples filing jointly, between $32,000 and $44,000, you may be liable to pay taxes on up to 50% of your benefits.
Individuals with individual combined income exceeding $34,000 (for individual filers) or couples with more than $44,000 in combined income may find that up to 85% of their Social Security benefits are taxable. Importantly, these thresholds remain constant year after year. However, as benefit income increases annually with COLA, a larger portion becomes susceptible to taxation over time.
Research conducted by The Senior Citizens League indicates that more beneficiaries may face federal income taxes on their benefit income during the current tax season, primarily due to the 8.7% COLA for 2023. This nonpartisan senior group is actively pushing for the regular updating and annual adjustment of tax thresholds, aiming to alleviate the tax burden on seniors concerning their benefit income. Mary Johnson, a Social Security and Medicare policy analyst at The Senior Citizens League, emphasized the escalating concern about taxation, stating, “Certainly, taxation has become a growing concern.” To mitigate the impact at tax time, retirees may choose to have funds withheld from their monthly checks.