There is good news and bad news on the horizon for the 71 million Americans who currently receive Social Security benefits due to a Cost-of-Living Adjustment (COLA), which will go into effect in 2024. Tax planning in retirement can vary widely. Therefore, the smartest move for new and future retirees who want to minimize federal taxes on retirement income is to partner with a financial expert who can provide lifelong guidance on how to minimize annual taxes. Tax planning is especially needed during the retirement years.
While this increase will give millions of retirees and other Americans breathing room when it comes to the recent waves of inflation, the increase in income may have impacts when it comes to federal income tax on pensions and social security.
In the meantime, here is an overview of the 2024 Social Security changes and they may affect both your income and your taxes in retirement.
Social Security Changes in 2024 for Beneficiaries
Social Security and Supplemental Security Income (SSI) benefits for more than 71 million Americans will increase by 3.2 percent in 2024, per an October 12 announcement from the Social Security Administration (SSA).
An estimated 66 million Social Security beneficiaries will start to see this 3.2 percent increase in their benefits beginning in January 2024. However, increased payments for an additional 7.5 million people will begin at the end of the year, on December 29, 2023.
The SSA is alerting beneficiaries via mail of this new change in benefits, and the updates can also be viewed online via an individual’s personal Social Security account at www.ssa.gov/myaccount.
COLA adjustments are not unusual and often occur at various intervals throughout a person’s retirement years. The Social Security Act of 1935 provides the guidelines for how the COLA is calculated. Furthermore, it essentially connects the annual COLA to the increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is routinely determined by the Department of Labor’s Bureau of Labor Statistics.
Additional Social Security Changes for Taxpayers
The 3.2 increase for Social Security beneficiaries also translates to adjusting federal taxes for taxpayers across the board. As a result, the maximum amount of earnings subject to the Social Security tax will increase to $168,600, up from $160,200 in 2023.
Generally, employed workers pay a 7.65 percent tax from their paychecks for both Medicare and Social Security. Self-employed individuals pay double this amount – 15.3 percent – to cover traditional employer and worker contributions.
Though the taxable maximum has increased for 2024, this likely won’t affect many American taxpayers. Approximately 6 percent of workers have earnings that are above the taxable maximum on an annual basis, according to the SSA.
How is Retired Income Taxed?
Retirement income is taxed in many different ways, depending on the annual income source, such as annuities, pensions, retirement plans like 401(k)s and IRAs, and Social Security.
When it comes to Social Security benefits, retirees may have to pay taxes on a portion of this income based on the following 2023 guidelines:
- If you file a federal tax return as an individual and your combined income from all sources is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- If you file a federal tax return as an individual and your combined income is more than $34,000, you may have to pay income tax on up to 85 percent of your benefits.
- If you file a joint federal tax return, and you and your partner have a combined income from all sources between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
- If you file a joint federal tax return, and you and your partner have a combined income of more than $44,000, you may have to pay income tax on up to 85 percent of your benefits.
Tax Planning for Retirement
Remember that if you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS, or you can also choose to have federal taxes withheld from your benefits.
In addition, there are upcoming changes to the earnings limits for beneficiaries younger than the full retirement age, and workers who have reached the full retirement age. (The Full Retirement Age Chart from the Social Security Administration outlines these benchmarks.)
- In 2023, if you’re under full retirement age the annual earnings limit is $21,240. In 2024, this amount will increase to 22,320.
- If you reach full retirement age in 2023, the limit on your earnings for the months before full retirement age is $56,520. In 2024, this will increase to $59,520.
Simply put, there are several outlying and additional changes that stem from the 3.2 percent increase in Social Security benefits in 2024. It’s important to understand how your income, retirement account withdraws, and annual taxes may be impacted by the adjustments ahead.
Understanding these Upcoming Social Security Tax Changes Starts with a Conversation with Waters Hardy
At Waters Hardy, we provide exceptional financial guidance and expertise both before and during your retirement years to ensure that your hard-earned money stays in your pocket and that you are well prepared for many golden years ahead.
Tax laws and Social Security regulations and guidelines are constantly changing and evolving. Therefore, you need an expert partner to help determine how the upcoming 2024 changes will impact your income, as well as any unknown adjustments that are years away.
Connect with us today to start a conversation about the 2024 changes and how you can be best prepared. We’re always available to discuss your unique financial situation now, as well as years from now, and how to maximize your income and minimize your taxes well into the future.
Our team at Waters Hardy is your best resource for navigating the financial terrain ahead.
Let’s work together to ensure that regardless of your income or retirement status, you are well prepared for the future.