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As inflation kept prices high in 2022, Social Security recipients can expect a record cost-of-living adjustment in 2023.
“Your Social Security benefits will be increase by 8.7% in 2023 due to the rising cost of living,” the Social Security Administration says in the annual statements it currently sends to recipients.
The 8.7% increase will be the highest in 40 years. This is also a significant step back from the 5.9% increase in the cost of living that beneficiaries saw in 2022.
The increase is “kind of a double-edged sword,” according to Jim Blair, a former Social Security administrator and co-founder and principal consultant at Premier Social Security Consulting, which educates consumers and financial advisers on the benefits of the program.
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“It’s good for the Social Security people,” Blair said. “His not so good for the economy with inflation.”
Social Security benefit checks will reflect the increase from January.
The average retiree benefit will increase by $146 per month, to $1,827 in 2023 from $1,681 in 2022, according to the Social Security Administration. The average disability benefit will increase by $119 per month, to $1,483 in 2023 from $1,364 in 2022.
What else, standard Medicare Part B premiums will decline about 3% next year to $164.90, down $5.20 from 2022. Medicare Part B covers outpatient medical care, including doctor visits.
Monthly Part B premium payments are often deducted directly from Social Security checks. Due to lower 2023 premiums, recipients are poised to see more of the 8.7% increase in their monthly Social Security checks.
“The good news about these letters is that people realize 100% of the 8.7% increase,” said David Freitag, financial planning consultant and social security expert at MassMutual.
“Of course the the economy is inflated at an appalling rate, but that’s the value of Social Security’s cost-of-living-adjusted benefits,” Freitag said.
Few other sources of retirement income offer cost-of-living adjustments, he noted.
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If you’re wondering how much you still have to see on your checks, the Social Security Administration’s personalized letter will give you a breakdown of what to expect.
This includes your new 2023 monthly benefit amount before deductions.
It will also tell you your 2023 monthly deduction for Medicare Part B premiums, as well as Medicare Part D, which covers prescription drugs.
The statement will also show your voluntary withholding tax deduction.
After these deductions, the statement shows the amount that will be deposited into your bank account in January.
It’s worth noting that you don’t necessarily need to be receiving Social Security checks now to qualify for the record 2023 increase, Blair noted.
“The good news is that you don’t need to apply for benefits to receive the cost-of-living adjustment,” Blair said. “You just have to be 62 or older.”
If your income exceeds a certain amount, you can pay extra called the Income-Related Monthly Adjustment Amount, or IRMAA, on Medicare Parts B and D.
This year, that will be determined by your 2021 tax returns, including your adjusted gross income and tax-exempt interest income. These two amounts are added together to get your Modified Adjusted Gross Income, or MAGI.
In 2023, those IRMAA premium rate comes into play if your modified adjusted gross income is $97,000.01 or more and you filed your tax return as single, head of household, eligible widow or widower, or married by filing separately; or $194,000.01 or more if married and filed jointly.
Notably, just one more dollar could put you in a higher bracket.
“It’s important for everyone to ensure that the adjusted gross income amount they use for IRMAA surtaxes matches what they filed on their tax return two years ago,” Freitag said.
If the information does not match, you “must absolutely appeal,” he said.
Because IRMAA surcharges can be extremely large, this is an area to watch for errors, Freitag said.
If your income has decreased since your 2021 tax return, you can appeal your IRMAA.
This applies if you have been affected by a life-changing event and your modified adjusted gross income has fallen by one band or below the lower amounts in the table.
Qualification life changing events, according to the Social Security Administration, include marriage; divorce or annulment; death of a spouse; you or your spouse have reduced your working hours or stopped working; you or your spouse have lost property income due to a claim; you or your spouse have experienced the termination, termination or reorganization of an employer pension plan; or you or your spouse received a settlement from an employer or former employer due to bankruptcy, closure or reorganization.
To report this change, recipients must complete Form SSA-44 with the appropriate documentation.
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As your Social Security income increases with the 8.7% COLA, it may also push you into another tax bracket or IRMAA, Freitag noted.
This requires careful monitoring of your income, he said.
Keep in mind that in two years you could receive exposed to IRMAA problems if you’re not careful.
It’s a good idea to have taxes withheld from social security benefits to avoid a tax liability when you file your tax returns, according to Marc Kiner, CPA and co-founder of Premier Social Security Consulting.
“Do it as soon as you can,” Kiner said of filling the voluntary deduction request form.
To better assess how IRMAA or benefit taxes may affect you in the future, it may be helpful to consult with a tax advisor or CPA who can help identify tax-efficient strategies, Freitag said.