Millions of seniors today look to Social Security as a major source of retirement income. And if you've recently started collecting benefits, you may be eager to make the most of that money.
But it's also important to understand how Social Security benefits work once you're getting them. Here are some important points to keep in mind.
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1. Benefits are eligible for an annual raise
The monthly benefit you start out collecting from Social Security isn't necessarily the same benefit you're stuck with for life. Social Security benefits are eligible for an annual cost-of-living adjustment, or COLA. But COLAs also aren't guaranteed.
Social Security COLAs are based on inflation. So if living costs rise from one year to the next, your Social Security benefits might increase. But if living costs stay flat or decrease, your benefits may not get a raise.
The good news, though, is that Social Security benefits can't decrease from one year to the next. So even if inflation slows down, in a worst-case scenario, you'll be looking at a $0 COLA -- not a reduced monthly benefit.
2. Medicare Part B premiums are deducted from Social Security if you're signed up for both programs
It's possible to start receiving Social Security before you're eligible for Medicare. That's because Social Security eligibility begins at age 62, but for Medicare, you need to wait three more years to get coverage.
Once you're enrolled in Medicare, your Part B premium costs will be deducted from your Social Security benefits. That's a good thing for two reasons. First, it gives you one less monthly bill to have to think about. Second, if Part B premium hikes exceed your COLA in a given year, you're protected from seeing your monthly Social Security benefits reduced from one year to the next.
3. You may be taxed on your benefits
Some people are shocked to learn that Social Security income is taxable. But if you have income outside of those benefits, the IRS may be entitled to a portion of them.
To see if your Social Security benefits will be taxable, you need to calculate your provisional income. That figure is half of your annual Social Security benefit plus 50% of your adjusted gross income and any tax-free income you earn.
Once your provisional income reaches $25,000 and you're single, you might be taxed on your Social Security benefits. The same applies when your provisional income reaches $32,000 and you're part of a married couple filing a joint tax return.
You should also know that 12 states tax Social Security benefits, too. If you reside in one of these, you may be subject to additional taxes (though if you're a low or moderate earner, you might quality for an exemption).
You've worked hard and paid into Social Security all your life, so if you're finally getting benefits, you deserve to enjoy them and use them to help make retirement stress-free. But it's just as important to understand these rules to know exactly what to expect from your benefits year after year.
