On Tuesday, October 13, 2020, the Social Security Administration released important facts and figures for 2021 - including cost-of-living adjustments (COLA) for retirees and tax changes for the currently employed.
The Good? Benefits Are Increasing
Those receiving Social Security benefits will see a 1.3 percent COLA increase in 2021. This change will impact around 70 million Americans - including 8 million SSI beneficiaries1 including those living Milwaukee.
For the average retiree receiving Social Security benefits in January 2021, this will translate to a roughly $20 increase in monthly benefits - $1,543 up from $1,523. For couples both receiving benefits, the average will increase to $2,596 from $2,563.1
Of note, this year’s COLA increase is lower than the previous two years - although, of course, a cost-of-living adjustment is never guaranteed in the first place. In 2009, 2010 and 2016, COLA bottomed out at zero percent. And in 2016, the COLA was a mere 0.3 percent - substantially lower than the 2.8 percent increase we saw in 2018.2
The Bad? Taxes Are Increasing Too (For Some)
For those still working, the amount of earnings subject to Social Security tax has increased 3.7 percent from $137,700 in 2020 to a maximum of $142,800 in 2021.1 Employees and their employers will each continue to pay 6.2 percent of applicable earnings toward the 7.65 percent combined Social Security and Medicare rate.1 The 3.7 percent increase in applicable income is only in reference to the Social Security portion of the combined tax rate. Self-employed individuals will still be responsible for paying the full 15.3 percent of the Social Security and Medicare tax rate.1 That said, proactive tax planning can help tax payers reduces their tax liability.
For reference, the maximum Social Security tax in 2021 for a high-earning employee would be $8,853.60 - or $17,707.20 total including both the employee and employer’s contribution. This is compared to 2020’s maximum of $8,537.40, or $17,074.80 total.
The Need To Know? Earning Limits For Retirees
For those under the Social Security Administration’s determined full retirement age who are receiving a paycheck while receiving SS benefits should be aware of 2021’s earning limit changes.
Currently, full retirement age is considered to be 66, if you were born between 1943 and 1954. Below is a chart provided by the SSA in regards to full retirement age:3
Year of Birth
|Full Retirement Age|
||66 & 2 months
66 & 4 months
||66 & 6 months
||66 & 8 months
||66 & 10 months
|1960 & later
Those receiving benefits who have not yet reached full retirement age will be docked $1 in benefits for every $2 earned above $18,960 (or $1,580 per month) in 2021. This is an increase of $720 from 2020's $18,240 per year limit.
It’s important to note that this limit increases somewhat substantially for those who will be reaching full retirement age that year. For 2020, that income limit is $48,600 per year, or $4,050 per month. In 2021, retirees will see that limit increase to $50,520 per year, or $4,210 per month. Applicable income earned above this amount will be withheld at a rate of $1 dollar for every $3 earned above the limit.
Beginning in the month you reach full retirement age, you will no longer be subject to earning limits.
Keeping track of changes in tax rates and future income is an important part of having a well-established retirement plan. If you’re wondering how these changes will affect your own financial standings, reach out to your financial advisor or contact our office if you'd like to learn more about how we can help you. David DeMore, CFP®, MSFS, EA is a tax and wealth advisor helping clients in Brookfield, Mequon, Elm Grove, Milwaukee and Lake Country plan for retirement which includes Social Security and retirement income planning.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.