Retirees will see an increase of 8.7% in cost-of-living adjustment Social Security benefits and a 3.1% decrease in Medicare Part B premiums in 2023. The boost in benefits–the largest in 41 years–was due to record inflation this past year and the drop in premiums was a result of the Inflation Reduction Act of 2022. Medicare Part B premiums surged 13.6% since the U.S. Centers for Medicare and Medicaid Services (CMS) were required to increase reserves for Aduhelm, a newly approved Alzheimer’s drug. This $21.60 monthly raise was one of the largest in Medicare’s history.
Typically, Medicare Part B premiums are deducted from Social Security benefits, which overall will compound next year. With the additional income from these changes, some might end up paying higher taxes on Social Security, which in turn can put them in a higher tax bracket.
How are Social Security benefits taxed?
Social Security tax is based on your combined–or provisional–income, which includes wages, self-employment, interest, dividends, withdrawals from a retirement plan–e.g. traditional IRA or 401(k)–, and even tax-free interest from municipal bonds.
The formula to calculate combined income is adjusted gross income (AGI) + non-taxable interest + ½ Social Security benefits.
If your combined income is:
- Single individuals: Between $25,000-$34,000, up to 50% of your benefits are taxable (more than $34,000 is up to 85%)
- Married couples filing jointly: Between $32,000-$44,000, up to 50%of your benefits are taxable (more than $44,000 is up to 85%)
One of the better ways to decrease Social Security taxation is to control your interest income on your tax return. For example, if you have dividend or municipal bond income, consider using an annuity to defer taxes later on while reducing (or eliminating) your Social Security taxes. Retirement plan withdrawals should also be carefully accounted for. This is one of the primary reasons to either contribute or convert to a Roth before age 62 is pertinent as tax-free withdrawals are not part of the equation.
Each January, you will be mailed a Social Security benefits statement (Form SSA-1099) showing what was received in the previous year.
When did Social Security benefits start being taxed?
Contrary to different misconceptions, Social Security benefits became taxable during both the Raegan and Clinton Administrations. On April 20, 1983, President Reagan signed into law the Social Security Amendments of 1983, effective January 1, 1984, which started taxing up to 50% of benefits. On August 10, 1993, President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993, effective January 1, 1994, which increased up to 85% of benefits.
What are the Medicare Part B premiums for 2023?
Since 2007, Medicare Part B premiums have been based on your modified adjusted gross income (MAGI) from two years prior. For example, the 2023 premiums will be based on the 2021 MAGI reported on your tax return. If it’s above a certain amount, you’ll pay the standard premium amount and an income-related monthly adjustment amount (IRMAA).
Find out what your Medicare Part B premium will be in 2023:
- Single individuals:
- Less than or equal to $97,000: $164.90
- More than $97,000 and less than or equal to $123,000: $230.80
- More than $123,000 and less than or equal to $153,000: $329.70
- More than $153,000 and less than or equal to $183,000: $428.60
- More than $183,000 and less than $500,000: $527.50
- More than or equal to $500,000: $560.50
- Married couples filing jointly:
- Less than or equal to $194,000: $164.90
- More than $194,000 and less than or equal to $246,000: $230.80
- More than $246,000 and less than or equal to $306,000: $329.70
- More than $306,000 and less than or equal to $366,000: $428.60
- More than $366,000 and less than $750,000: $527.50
- More than or equal to $750,000: $560.50
- Married individuals filing separately:
- Less than or equal to $97,000: $164.90
- More than $97,000 and less than $403,000: $527.50
- More than or equal to $403,000: $560.50
With the Federal Reserve increasing interest rates, make sure to pay attention to how much you’re earning on savings, including money market accounts, and certificates of deposit (CD), that can increase your overall income. Also, either retirement plan withdrawals or required minimum distributions (RMDs) can significantly contribute to both the Social Security taxes and Medicare Part B premiums.