Despite Big Social Security Changes in 2022, This Rule Will Stay the Same — and It Could Cost You

In 2022 Social Security is changing in many important ways. Benefits are increasing by 5.9% thanks to a large Cost of Living Adjustment. The amount of money a worker needs to earn a work credit to become eligible for Social Security is increasing. The maximum income subject to Social Security tax is increasing. And the amount of money seniors can earn by working without affecting Social Security benefits is going up.

All of these changes are occurring because Social Security recognizes that wages and expenses go up over time. In order to ensure retirees retain buying power and that people are contributing an appropriate percentage of their income to Social Security, the SSA adjusts most key formulas to account for inflation and wage growth.

But there’s one number that isn’t going up. And the fact it doesn’t increase each year could end up costing a growing number of retirees an ever-increasing amount of money. Here’s what it is.

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This Social Security number doesn’t change

Although the Social Security Administration adjusts most of its financial metrics to keep pace with inflation and wage growth, there is no adjustment to the rules regarding how much income you can have before Social Security benefits become taxable.

If you are a single tax filer with a provisional income above $25,000 or a married joint filer with a provisional income above $32,000, you could be taxed on part of your benefits. Between 50% and 85% of Social Security benefits could be subject to tax. These $25,000 and $32,000 thresholds aren’t changing in 2022 — and they haven’t changed at all since they were set decades ago.

The problem is that the income level at which Social Security benefits become taxable is set in stone and doesn’t adjust automatically according to a set formula each year. In order for it to change, Congress would have to alter the law to raise the income limits at which benefits become taxable. And there hasn’t been any attempts to do that — and it’s not likely there will be in the near future.

Why is this such a big problem?

When Social Security benefits first became taxable in 1984, Congress set the income thresholds that still exist today. They apply to “provisional” income, which is half your Social Security benefit, all taxable income, and some non-taxable income. At the time the income limits were set, only around 10% of people ended up owing the IRS taxes on a portion of their benefits.

But since the income thresholds weren’t indexed to inflation, they didn’t change even as Cost of Living Adjustments and rising wages left retirees with higher Social Security checks — and even as rising prices necessitated people save and spend more to maintain their buying power. This meant more people have found themselves with provisional incomes above $25,000 or $32,000 each year. As a result, around half of all retirees now lose part of their benefits to Uncle Sam.

Next year, with retirees on track for a 5.9% Cost of Living Adjustment, there may be a big jump in income for seniors, and even more people could find themselves facing tax bills. This could be a big problem for retirees on fixed incomes whose raises may already not go far enough to cover the costs of rapidly rising prices.

Seniors need to know the threshold at which benefits become taxable — and, if they’ll cross it, should make plans for this added expense to come out of their budget.

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