Page 14 - Investment Advisor - Jan/Feb 2021

TRACKING TRENDS

By Ilana Polyak

3 Social Security Changes Coming in 2021

Taxpayers will pay a 6.2% Social Security tax and a 1.45% tax for Medicare
on the first $142,800 they earn this year.

y any measure, 2020 was an tion, so the earnings threshold usually
extraordinary year thanks to the goes up more than the COLA increases,”
Bcoronavirus pandemic, a sput- Floyd explains.
tering economy and other news. By President Joe Biden has proposed taxing
these standards, the changes to Social incomes over $400,000 for Social Security
Security are far less dramatic and won’t and Medicare as a way to bring in addi-
cause major disturbances. tional funds and shore up both systems.
Still, it’s important to be aware of The SSA says that both Social Security
them. For the average wage earner, and Medicare face long-term financial
Social Security makes up some 40% of shortfalls and estimates that trust funds
their pre-retirement come. of both will be depleted within a decade.
it’s typical for the COLA to not cover the If passed, Biden’s proposal would cre-
1. What the higher benefits will things that seniors spend their money ate a “donut hole,” between $142,800
look like. on,” Floyd explains. and $400,000 where no FICA tax would
Social Security benefits will rise by 1.3% in Another category that rises higher apply. “Over time, that donut hole will
2021. For the average Social Security recip- than inflation is health care, and retirees close as more income is taxed,” says
ient, that equals an additional $20 a month, are big consumers of that. Medicare Floyd. “But that will take decades.”
taking their checks from $1,523 to $1,543. Part B, the portion of the health insur-
While any increase is certainly ance plan for retirees that covers outpa- 3. The earnings limit will be higher.
welcome, it may not go that far, note tient care, medical equipment and other In 2021, beneficiaries who are collecting
Social Security experts. The Social medical services, will rise by 6%, from Social Security prior to reaching their full
Security COLA increase is based on the $144.60 to $153.30 a month. retirement age and continue to work will
Consumer Price Index for Urban Wage “Over the long term Medicare will have any income they earn over $18,960
Earners and Clerical Workers, known as consume a bigger and bigger portion taxed, an increase of $720 from 2020.
CPI-W from the fourth quarter of 2019 of a person’s Social Security check,” One benefit dollar of every $2 they
to the third quarter of 2020. says CFP Mark Orr of Retirement earn above that limit will be withheld.
That index includes some categories Wealth Advisors in Alpharetta, Georgia, In the year that beneficiaries reach their
of the goods and services that went and author of “Social Security Income full retirement age (FRA), however, the
up significantly more than 1.3%. Take Planning: Baby Boomer’s 2020 Guide to earnings limit goes up to $50,520 (from
food, for example. The Bureau of Labor Maximize Your Retirement Benefits.” $48,600). Plus, only $1 out of every $3
Statistics reports that food prices above that amount will be withheld.
increased 3.6% from November 2019 to 2. More earnings will be subject to According to the SSA, from the month
this November; utilities went up 4.4% Social Security taxation. individuals reach their FRA, their earnings
during that time period. Energy prices, For 2021, taxpayers will pay a 6.2% no longer reduce their benefits, no matter
however, declined nearly 10%. Social Security tax and a 1.45% tax for how much they earn. “We will recalculate
“Energy was down and that skewed Medicare (known together as FICA) on your benefit amount to give you credit for
everything,” says Elaine Floyd, author the first $142,800 they earn, up from the months we reduced or withheld ben-
of “Savvy Social Security Planning for $137,700 in 2020. efits due to your excess earnings,” it states.
Boomers,” and director of retirement There will be no FICA tax owed on Once beneficiaries reach full retire-
and life planning at Horsesmouth, any earnings above $142,800. (The year- ment age, their checks will be recalcu- Kim Reinick/Shutterstock
which helps advisors’ business building. ly increase in earnings is based on the lated to include the withheld amounts.
“But seniors don’t spend that much national average wage index.) They should receive more per month
on things like transportation. In general, “Wages tend to go up faster than infla- than they had been getting.

12 INVESTMENT ADVISOR JANUARY/FEBRUARY 2021 | ThinkAdvisor.com