What to know as record 8.7% Social Security COLA goes into effect

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With inflation keeping prices high in 2022, Social Security recipients can expect a record cost-of-living adjustment in 2023.

“Your Social Security benefits will increase by 8.7% in 2023 because of an increase in the cost of living,” the Social Security Administration notes in the annual statements it currently sends to beneficiaries.

The 8.7% increase will be the highest in 40 years. It’s also a significant increase from the 5.9% cost-of-living increase 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 about the program’s benefits.

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“It’s good for people on Social Security,” Blair said. “It’s not so good for the economy with inflation.”

Social Security benefit checks will reflect the increase starting in January.

The average retiree benefit will increase by $146 a 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 a month, to $1,483 in 2023 from $1,364 in 2022.

In addition, standard Medicare Part B premiums will drop 3% next year to $164.90, a decrease of $5.20 from 2022. Medicare Part B covers outpatient medical care, including doctor visits .

Monthly Part B premium payments are usually deducted directly from your Social Security checks. Because of the lower premiums in 2023, beneficiaries are set to see more than an 8.7% increase in their monthly Social Security checks.

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“The good news about these letters is that people are understanding 100% of the 8.7% increase,” said David Freitag, a financial planning consultant and Social Security expert at MassMutual.

“Of course, the economy is inflated at an alarming rate, but this represents 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.

What to look for on your Social Security return

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If you’re wondering how much more you might see in your checks, the personalized letter from the Social Security Administration 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 deductible 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.

The good news about these cards is that people are realizing 100% of the 8.7% increase.

David Freitag

financial planning consultant and Social Security expert at MassMutual

After those deductions, the statement shows what will be deposited into your bank account in January.

Note that you don’t necessarily have to be receiving Social Security checks now to benefit from the record increase in 2023, Blair noted.

“The good news is that you don’t have to apply for benefits to receive the cost of living adjustment,” Blair said. “You just have to be 62 or older.”

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When you can pay Medicare premium surcharges

If your income is above a certain amount, you may pay a surcharge 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. Those two amounts are added together to get your modified adjusted gross income, or MAGI.

In 2023, those IRMAA premium rates go into effect if your modified adjusted gross income is $97,000.01 or more and you filed your tax return as single, head of household, qualified widow or widower, or married filing separately ; or $194,000.01 or more if married and filing jointly.

Notably, just a dollar above that could put it in a higher bracket.

“It’s important for everyone to make sure the amount of adjusted gross income they’re using for IRMAA top-ups matches what they submitted on their tax return two years ago,” Freitag said.

If the information doesn’t match, “it’s absolutely necessary to file an appeal,” he said.

Because IRMAA surcharges can be extremely significant, that’s one area to watch for mistakes, Freitag said.

When to appeal your Medicare surcharges

If your income has gone down since your 2021 tax return, you can appeal your IRMAA.

That’s true if you were affected by a life-changing event and your modified adjusted gross income dropped one bracket or below the lowest amounts in the table.

According to the Social Security Administration, qualifying life-changing events include marriage; divorce or annulment; death of a spouse; you or your spouse have reduced your working hours or stopped working altogether; you or your spouse lost income from the property due to a disaster; you or your spouse experienced the termination, termination or reorganization of an employer’s pension plan; or you or your spouse received a settlement from an employer or former employer due to bankruptcy, closing, or reorganization.

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To report that change, beneficiaries must complete Form SSA-44 with appropriate documentation.

How much higher benefits can cost you

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As your Social Security income increases with the 8.7% COLA, that can also push you into an IRMAA or a different tax bracket, Freitag noted.

This requires careful monitoring of your income, he said.

Keep in mind that two years down the road you may be exposed to IRMAA issues if you’re not careful.

In addition, more of your Social Security benefits may be subject to income tax. Up to 85% of Social Security income can be taxed based on a unique formula that also takes other income into account.

According to Marc Kiner, CPA and co-founder of Premier Social Security Consulting, it’s a good idea to withhold taxes from Social Security benefits to avoid a tax liability when you file your income tax return.

“Do it as soon as possible,” Kiner said when filling out the voluntary withholding application form.

To better assess how IRMAA or income taxes may affect you in the future, it can be helpful to consult with a tax advisor or CPA who can help identify tax efficiency strategies, Freitag said.

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