Social Security benefits are a crucial part of retirement planning for many Americans. However, a growing number of retirees are finding themselves subject to what financial experts refer to as the “stealth tax” on Social Security.
The stealth tax refers to the taxation of Social Security benefits. When Social Security benefits were first taxed in 1984, income tax thresholds were established. These thresholds have not been adjusted since, meaning that as benefits increase due to annual cost-of-living adjustments (COLAs), more seniors find themselves having to pay income taxes on their Social Security benefits. This is particularly significant given the recent 8.7% COLA, the largest in over 40 years.
Individuals with provisional income above $25,000 and joint filers above $32,000 have up to 50% of their Social Security income taxed. For those with provisional income above $34,000 and joint filers above $44,000, up to 85% of Social Security is taxed. Provisional income includes your gross income, tax-free interest, and 50% of your Social Security benefits.
This stealth tax can come as a surprise to many retirees, who may not be aware of how their benefits are taxed. As such, it’s important to factor this into retirement planning and consider strategies to minimize the impact of these taxes.
In addition to the stealth tax, retirees also need to plan for Medicare premium increases, which is similar to a stealth tax. The standard monthly premium for Medicare Part B enrollees will be $174.70 for 2024, an increase of $9.80 from $164.90 in 2023. The annual deductible for all Medicare Part B beneficiaries will be $240 in 2024, an increase of $14 from the annual deductible of $226 in 2023.
These increases are primarily due to projected increases in health care spending. It’s important to note that Medicare Part B premiums are based on income, with higher-income beneficiaries paying a premium surcharge known as an income-related monthly adjustment amount (IRMAA).
Planning for these increases involves understanding the factors that contribute to the cost of Medicare premiums and exploring strategies to manage these costs. This could include considering alternative Medicare plans, adjusting income to avoid IRMAA, or seeking assistance through programs designed to help with Medicare costs.
In conclusion, understanding the social security stealth tax and planning for Medicare premium increases are crucial aspects of retirement planning. By staying informed and proactive, retirees can better navigate these financial challenges and secure a comfortable retirement.