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  • Barry Boscoe

Social Security COLA Increase-The Good and the Bad

The announcement of an 8.7% increase in Social Security benefits, on first blush is great news, especially with the continued high inflation we are experiencing. However, there are a number of traps to be aware of.

1) Social Security has a low-income tax threshold that is not indexed for inflation. Back in the 80s, individuals with incomes above $25,000 and couples above $32,000 had 50% of their benefits taxed. In 1993, the dollar amount of benefits taxed expanded to 85% for incomes over $44,000. It was said that only “wealthy” seniors would be impacted which amounted to about 10% of filers.

This is not true today as the thresholds were never adjusted for inflation, essentially, they were frozen in time since the Reagan and Clinton administrations. Currently they affect nearly 50% of seniors, which hardly constitutes the “wealthy”.

The current 8.7% increase will undoubtedly cause even more seniors to have an increase on their taxes relating to their benefits. If the tax thresholds were properly indexed, today they would not kick in until about $100,000.

2) There is another cloud on the horizon: the increases in Medicare Part B premiums. For higher earners, Medicare is now a means tested program. This means higher premiums when one earns more money. These increases are as known as IRMAA – Income Related Monthly Adjustment Amount.

IRMAA determines how much more of your Social Security check will get consumed by Medicare premiums. IRMAA will have a profound impact. For many, it may become the single largest expense during retirement.

Now is the time to consider tax free income planning, whether you are approaching retirement or already retired. Doing so is particularly important, because it impacts your 1) income tax rates 2) Social Security benefits and 3) Medicare Part B premiums.

As an example, taking a distribution from a traditional IRA or pension, results in additional taxable income, this can push the retiree into a higher income tax bracket. Not only will it create a higher tax but it can also increase the taxes on your Social Security benefits thus reducing your overall benefits!

The key is to find income sources that are not taxable. Fortunately, there are numerous solutions to creating tax free income.

In today’s inflationary environment, taking receiving tax free income will help avoid the threat of higher income taxes, reduced Social Security Benefits, and higher Medicare premiums!

If you have an interest in exploring the creation of tax-free income for retirement, please contact me at 818-342-9950 or use my calendar link to schedule a time that will work best for you.

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