In 2022, Social Security retirees will be getting the most generous Cost of Living Adjustment (COLA) in decades. Seniors will see a 5.9% increase in the amount of their retirement benefit, according to the Social Security Administration.
Before you get excited about all this spare cash, though, you should be aware that your checks may not actually end up being 5.9% bigger. That's because there are two possible ways you could end up losing some of your additional benefits. Here's what they are.
1. Higher Medicare premiums will take away part of the increase for many recipients
Rising Medicare costs are one of the main reasons seniors on Medicare will lose some of their Social Security benefits increase. The costs of Medicare premiums are usually deducted from Social Security checks, and premiums are expected to increase by 6.2%, according to the Congressional Research Service.
With premiums going from $148.50 in 2021 to an estimated $157.70 in 2022, retirees will lose around $10 of their benefit boost. While this may not sound like a fortune, the average retiree is getting just $92 more per month because of the COLA. So, the extra Medicare premiums could take about 11% of their "extra" cash. The Medicare Part B deductible is also expected to increase next year, leaving retirees to spend still more of their COLA on healthcare if they use covered services.
Seniors can't do much about these rising premiums, but should make sure to plan for them in their budget.
2. Some seniors will find more of their money is subject to taxes
Seniors may also find themselves losing some of their extra benefits for another reason as well. They could find more of their Social Security income is subject to taxes.
See, Social Security benefits become taxable once countable income reaches a certain threshold. For single tax filers, benefits become partly taxable with a countable income above $25,000, and for married joint filers they become partly taxable with an income above $32,000. Countable income is half of Social Security benefits, taxable income, and some non-taxable income.
With Social Security benefits going up, more people could find themselves with an income that exceeds these limits. If more Social Security benefits become taxable, or if benefits become taxable for the first time, this could also cut into the amount of money retirees get to keep from their raise.
Eliminating IRS taxes on Social Security is difficult since it requires being strategic about withdrawals -- or taking money out of accounts with non-taxable distributions, such as Roth IRAs. However, retirees who live in one of the 13 states that tax Social Security benefits and who find some or all of their retirement income subject to new taxes because of increased earnings may want to consider relocating to one of the majority of locales without a state Social Security tax.
Ultimately, retirees should be prepared for the fact that not all of their Social Security COLA will be theirs to keep in 2022. Before adjusting your budget upwards based on news of a raise, take taxes and Medicare premiums into account so you don't end up overspending in the New Year.