From an increase to the retirement age to an increase in Medicare surcharges, retirees will see quite a few changes to their Social Security benefits and Medicare expenses in 2018. This article highlights some of the major changes retirees should be aware of.
Retirees are finally getting a 2% increase in their Social Security benefits in 2018, which is the largest cost-of-living adjustment in six years. For individuals, the average retirement benefit will increase by $27 to $1404 per month. For couples, the average retirement benefit will increase by $46 to $2,340 per month. For lifelong high earners who hold off collecting their benefits until full retirement age, their maximum monthly Social Security benefit will increase by $101 per month to $2,788.
Individuals with a modified adjusted gross income (MAGI) exceeding $85,000 and married couples with a MAGI exceeding $170,000 will pay more for both Medicare Parts B and D in 2018. The monthly surcharges, which range from $187.50 to $428.60 per person, for Medicare Part B will remain the same this year, however, a few of the income tiers that generate those premiums have changed. This year’s premiums are calculated off the 2016 tax returns. Individuals with incomes exceeding $135,000 and married couples exceeding $267,000 in 2016 will pay higher Medicare premiums in 2018. This is still the case even if their 2016 income did not increase from 2015.
Increase in Payroll Taxes
The maximum wages subject to payroll taxes has increased by $1,200 in 2018. These taxes, also known as FICA taxes, are what fund Social Security benefits. Employers and employees each pay 7.65% of the first $128,400 of wages in 2018. This results in high-income workers paying an additional $91.80 in payroll taxes for 2018. Individuals with earned income above $200,000 and married couples with earned income over $250,000 will pay an additional high-income surcharge of 0.9% in Medicare taxes.
Those who continue to work and claim their Social Security benefits before reaching their full retirement are subject to earnings restrictions. Retirees who are younger than 66 can earn up to $17,040 before losing any benefits, which is $120 more than last year. Once they have reached that number, they would forfeit $1 in benefits for every $2 earned. Anyone who turned 66 in 2018 can earn up to $45,360 in the months preceding their birthday, without threatening any benefits. This number has increased by $480 from last year. For every $3 earned over that limit, they would lose $1 in benefits. Once they reach full retirement age, the earnings cap dissolves. Benefits that were lost to the earnings cap are restored in the form of higher monthly benefits at full retirement age.
Full Retirement Age is Increasing
For workers born after 1954, the current full retirement age of 66 is increasing. For individuals born in 1956 who turn 62 in 2017, the full retirement age is 66 and 4 months. They can claim their Social Security benefits as early as age 62, but doing so would reduce their benefits by 26.67% compared to a 25% reduction for those with a full retirement age of 66 who claim at 62.
Changes to Eligibility Costs
In 2018, to be eligible for Social Security and Medicare, workers must earn at least 40 Social Security credits, with a maximum of four credits per year. Each credit represents $1,320 in earnings, which is up $20 from last year. As a result, an individual must earn at least $5,280 in 2018 to qualify for the maximum four credits, which is an $80 increase from 2017.
Social Security Benefits are Still Taxable
Social Security benefits are still being taxed in the same manner as years prior. Social Security benefits are taxed based on combined income, including taxpayers adjusted gross income, plus tax-exempt interest and half of their Social Security benefits. Individuals whose combined income is between $25,000 and $34,000 pay income taxes on up to half of their benefits. Once their income exceeds $34,000, they would pay income taxes on 85% of their benefits. Married couples with a combined income between $32,000 and $44,000 would pay taxes on 50% of their Social Security benefits. Once their combined income exceeds $44,000, they would pay taxes on 85% of their benefits.
If you have any questions about the information in this article or would like one of our advisors to review your personal situation to determine how you will be affected, give our Denver office a call at 303-741-9772, or contact us to schedule an appointment here.