Cost of Living Increase to Rise in 2022
As the economy continues to react to the effects of the continuing Coronavirus pandemic, the federal government has announced the Cost of Living Adjustment (COLA) for Social Security recipients in 2022.
The adjustment of 6.2% is a dramatic rise from the Social Security COLA for 2021, which is currently set at 1.3%. This would be the most significant adjustment since 2009 which saw a 5.8% increase.
While this may seem like good news – and in part it is – the announced change is also a reflection of rising inflation.
One example of rising prices can be seen in the cost of gasoline. Over the past 12 months, it’s risen 41.8%, and due to the part it plays in local and national economies, as gasoline becomes more expensive, the effect has been felt by everyone.
Another reason for this rise in COLA can also be attributed to the broader consumer price index (CPI). This measurement reviews the weighted average of consumer goods and services. These factors could include transportation, food, and medical care.
The Effects on Social Security Benefactors
As of this year, there are 70 million Americans who collect Social Security and Supplemental Security income. How the cost of living hike will affect recipients is defined by Social Security as:
- The maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $142,800.
- The earnings limit for workers who are younger than “full” retirement age (see Full Retirement Age Chart) will increase to $18,960.
- The earnings limit for people reaching their “full” retirement age in 2021 will increase to $50,520.
- There is no limit on earnings for workers who are “full” retirement age or older for the entire year.
Social Security Earnings and Your Taxes
This projected increase in benefits will also affect your taxable income if you currently collect Social Security. When it concerns paying taxes on this income, the government has set out several guidelines.
First, no one collecting Social Security will have all of their benefits taxed. The highest level one could be taxed at is 85% of their earnings.
Calculating what you do owe is based on your adjusted gross income from all of the sources you collect, including Social Security. This includes wages, earnings from being self employed, interest, dividends, required minimum distributions from qualified retirement accounts and any other income that is taxable.
If the final calculation exceeds the minimum tax levels, 50 – 85% of your Social Security benefits will be taxable.
Other factors including how you file your federal tax return – as an individual, married, with dependents, etc. – can affect this tax calculation as well.
Navigating these changes can be confusing, and preparing taxes by yourself can result in errors that only complicate things. Using a CPA for tax preparation or other accounting services takes the weight off of you and helps assure your returns are properly calculated and filed.