How to Protect Your Social Security Benefits from a COLA Rise

SmartAsset: How a Mass Rise of COLAs Can Really Affect Your Social Security

SmartAsset: How a Mass Rise of COLAs Can Really Affect Your Social Security

Social Security growth of 5.9% in 2022, the largest increase in the cost of living in four decades. And next year, it could go even higher depending on inflation. However, the larger payments can come with a significant caveat for some beneficiaries, pushing their income above the threshold that determines their Medicare Part B premium and amount. Social Security Benefits subject to income tax.


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Definition of COLA

The federal government adjusts the amount of Social Security payments that beneficiaries receive each year to keep up inflationary. This change is called a Cost of Living Adjustment or COLA, and it is intended to maintain the purchasing power of Social Security benefits.

The Social Security Administration calculates its COLA each year by measuring inflation in the third quarter over the previous year. To do this, the government examines the 12-month change in Consumer price index Urban Clerks and Clerks (CPI-W) and then increase Social Security benefits to match the rate of inflation.

With prices of goods and services skyrocket in 2021Social Security collectors have seen their benefits grow by 5.9% in 2022. And while that sounds like great news, it also means some beneficiaries. also saw their Medicare Part B premiums go up and many of their benefits tax deductible.

COLA and Medicare Premiums Partial

SmartAsset: How a Mass Rise of COLAs Can Really Affect Your Social Security

SmartAsset: How a Mass Rise of COLAs Can Really Affect Your Social Security

Medicare Part B premiums, which cover physician and outpatient services, are deducted from a person’s monthly Social Security check. The amount you pay is related to your income. If your adjusted adjusted gross income (MAGI) is higher than a certain amount, you can pay what is known as the Income-Related Monthly Adjustment Amount (IRMAA).

The monthly premium for single individuals earning $91,000 or less and couples earning $182,000 or less is $170.10 in 2022. For taxpayers earn more, premiums can go up to $578.30 per month.

Here’s a look at the respective monthly Part B income and premium thresholds:

Medicare Part B premiums Annual income for individuals Annual income for couples Part B monthly premium (2022) Up to $91,000 Up to $182,000 $170.10 $91,001- $114,000 $182,001- $228,000 $238.10 $114,001- $142,000 $228,001- $284,000 $340.20 $142,001-442.30,000 $284,001 $340,001- $749,999 $544.30 $500,000 or more $750,000 or more $578.30

Annual COLAs can put Social Security beneficiaries in the next income bracket and lead to higher Part B premiums. For example, a single person with an annual retirement income of $113,500 has a deduction of $238.10 from his Social Security benefits each month for Part B. But after receiving Social Security. 5.9% increase through the 2022 COLA increase, the person will exceed the current income threshold and pay $297 per month in Part B premiums.

Meanwhile, premiums have grown faster than COLAs in recent decades. Based on “The impact of inflation on social security benefits” published by the Center for Retirement Research at Boston University, Part B premiums increased an average of 5.9% annually from 2000 to 2020. Increase in Social Security benefits averaged just 2, 2% per year for the same time period.

Alicia H. Munnell and Patrick Hubbard write: “The impact of the increase in Part B premiums will be even greater for high-income earners, because their premiums account for a larger share of Social Security benefits. Their society.

COLA and taxes

SmartAsset: How a Mass Rise of COLAs Can Really Affect Your Social Security

SmartAsset: How a Mass Rise of COLAs Can Really Affect Your Social Security

Like the Part B premium, next year’s COLA could have a more significant impact on how Social Security benefits are taxed than in previous years. Under current federal law, individuals with a combined gross income of $25,000 to $34,000 must pay federal income tax on up to 50% of their Social Security benefits, while those with a combined gross income of $25,000 and $34,000 pay federal income tax on up to 50% of their Social Security benefits. Combined incomes over $34,000 will pay federal income taxes up to 85% of their benefits. Meanwhile, married couples pay taxes on up to 50% of their combined income if it’s between $32,000 and $44,000. Up to 85% of benefits are taxable if a couple’s combined gross income is over $44,000.

However, the Center for Retirement Research notes that these income thresholds don’t increase each year “according to wage or price growth,” leaving more and more Social Security recipients taxed on benefits. their.

“Personal income tax with unindexed thresholds for taxing mean wages
growth and inflation will increase a portion of the Social Security benefit on taxation. Taxation further reduces the net benefit that people will receive.

How to Protect Your Social Security Benefits

Reducing gross income is one of the most popular strategies for protecting assets like Social Security benefits from higher tax rates. A qualified charitable distribution from an IRA is one way to do that.

A qualified charity deduction or QCD is money transferred directly from an IRA to a charity. Contributions are not considered part of your taxable income and may meet your required minimum distribution (RMD). For example, someone asked to withdraw $20,000 from their IRA could instead simply transfer the money to a qualified charity, reducing their tax bill.

“Using the Required Minimum Distribution (RMD) for charities is one thing,” says Ryan Marshall, a certified financial planner and accredited investment trustee at Ela Financial in New Jersey. great way to help reduce client income especially as RMD grows. “Most customers have donated to charities, so instead of the money coming from a customer’s checking or savings account, we use an IRA RMD to fund the donations. their charity.”

For example, he notes, if a client asked to withdraw $30,000 from her IRA finds herself over the $10,000 Medicare income threshold, she can make a $10,000 charitable donation directly from your retirement account and avoid paying higher Part B premiums.

“They’re donating anyway,” Marshall noted. “It’s just a matter of how and where they donate.”


As prices of goods and services continue to rise, the federal government uses an annual Cost of Living Adjustment to ensure Social Security benefits can keep up. The COLA increase in 2022 is 5.9%, the largest increase in four decades. And next year, that number could be even higher depending on the rate of inflation, which could lead to larger tax bills and higher Medicare Part B premiums for some Social Security beneficiaries. Society. Reducing your gross income by donating the required minimum distributions from an IRA to charity can help mitigate the potential negative impact of the historic COLA next year.

Social Security Planning Tips

  • Social Security eligibility begins at age 62, but the longer a person delays receiving their benefits, the larger those benefits will be. Use SmartAsset’s Social Security Calculator to see how much you can collect at different ages.

  • SmartAsset’s free tool compare you with up to three financial advisors serving your area, and you can interview your mentors for free to decide which is right for you. If you are ready to find an advisor who can help you achieve your financial goals, start right now.

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Post How a Mass Increase in COLA Could Really Affect Your Social Security appeared first on Blog SmartAsset.


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