Posted on Friday, 14th July 2023 by

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Social Security recipients are required to pay taxes on their combined income if it exceeds the following limits according to the Social Security Administration.

You will pay tax on 50 to 85 percent of your Social Security benefits, depending on your income and based on Internal Revenue Service (IRS) rules. If you:

  • file a federal tax return as an “individual” and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • If you earn more than $34,000, up to 85 percent of your benefits may be taxable.
  • file a joint return, and you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
    • If you earn more than $44,000, up to 85 percent of your benefits may be taxable.
  • are married and file a separate tax return, you probably will pay taxes on your benefits.




Determining Your Combined Income

Add your nontaxable interest and one half of your Social Security benefit to your adjusted gross income to determine your Combined Income:

Adjusted Gross Income
+ Nontaxable interest
+ ½ of your Social Security benefits
Your combined income

Your combined income is the total of your adjusted gross income including 50 percent gross Social Security benefits, plus tax-exempt interest, any exclusions from income such as interest from qualified US savings bonds and the foreign earned income or foreign housing exclusions.

Unfortunately, the Social Security combined income amounts haven’t been adjusted for inflation in 40 years and many Social Security recipients are paying federal income tax on their Social Security retirement benefits.

Caution: If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have federal taxes withheld from your benefits. I recently increased my federal tax withholding for my annuity and Social Security benefit to avoid a penalty when I file my taxes next year.

Medicare Part B (MAGI)

Medicare’s Part B enrollee’s monthly premiums are determined annually using modified adjusted gross income (MAGI) computations. Premiums are determined for 2023 from the enrollee’s 2021 tax return because Social Security and Medicare won’t have the tax return data for 2022 until taxes are filed with the IRS mid-2023.

Premiums for Part B are determined by your Modified Adjusted Gross Income (MAGI). The more you earn the higher your Part B premium. For most beneficiaries, the government pays a substantial portion—about 75 percent, and the beneficiary pays the remaining 25 percent.

If you’re a higher-income beneficiary, you’ll pay a larger percentage of the total cost based on the income you report to the Internal Revenue Service (IRS). You’ll pay monthly Part B premiums equal to 35, 50, 65, or 80 percent of the total cost, depending on MAGI which is the total of your household’s Adjusted Gross Income plus any tax-exempt interest income you may have.

In 2023, monthly Medicare Part B premiums begin at $164.90 per month. An Income Related Monthly Adjustment Amount (IRMAA) is added to your payment if a single individual’s MAGI was greater than $97,000 during 2021 and for a married couple filing jointly, if their MAGI during 2021 exceeded $194,000. Medicare Part B monthly premiums can be as much as $560.50 this year for those enrollees in the top income threshold.

Social Security notifies enrollees annually of their benefit changes including voluntary tax withholding, and their Part B premiums if applicable. I received my last notice November 23, 2022.

Unexpected / Unfortunate Consequences

Unlike Social Security taxing thresholds, the income limits are adjusted annually for part B Medicare premiums. This should also be the case for taxing thresholds for our Social Security benefits. The cost of living has risen considerably over the past 40 years.

$100 in 1983 is equivalent in purchasing power to about $306.33 today according to the Bureau of Labor Statistics consumer price index. A dollar today only buys 32.68% of what it could buy back then.

You would think that NARP and NARFE would be championing this initiative. To be fair, the Social Security taxing thresholds should be tripled from where they are today!

Retirees are caught off guard when an Income Related Monthly Adjustment Amount (IRMAA) is added to their Medicare premium and end up paying more income taxes on their Social Security benefit. This can be triggered when the annuitant starts taking Required Minimum Distributions (RMDs).

This could also happen if you sell a vacation or business property, and stocks that have significant capital gains. Working part-time or owning a small business in retirement will also increase your income, oftentimes to levels resulting in increased taxes and higher Part B premiums.

References:

Helpful Retirement Planning Tools


Disclaimer: The information provided may not cover all aspect of unique or special circumstances, federal regulations, medical procedures, and benefit information are subject to change. To ensure the accuracy of this information, contact relevant parties for assistance including OPM’s retirement center. Over time, various dynamic economic factors relied upon as a basis for this article may change.

The advice and strategies contained herein may not be suitable for your situation and this service is not affiliated with OPM or any federal entity. You should consult with a financial, medical or human resource professional where appropriate. Neither the publisher or author shall be liable for any loss or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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