When you get your first Social Security check of 2022, chances are good it's going to look different from the last one you got in December.
There are a few good reasons the amount you get may not be the same as it was before. Here's what you need to know about how your Social Security check may have changed after the start of the new year.
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1. You'll get higher monthly checks
The first change is good news for retirees. Your monthly benefit check in January should be larger than the payments you received last year.
This bump up in your benefits is due to a cost-of-living adjustment (COLA). Specifically, because of high inflation, retirees are entitled to a 5.9% raise in 2022. This is intended to help ensure you don't lose ground as the price of goods and services goes up. It's the biggest raise in decades because inflation is surging.
Don't expect a full 5.9% increase in each check, though. Medicare premiums also went up. If you have premiums deducted directly from your Social Security payment, you will see some of your raise disappear as a result of higher premiums.
2. You could find more taxes are taken out
When you sign up for Social Security benefits, you can elect to have taxes taken out of your checks so you don't have to worry about paying estimated taxes to the IRS. You have a choice of asking the Social Security Administration to withhold 7%, 10%, 12%, or 22% of your monthly benefit. If your benefit goes up and you're having taxes withheld on a percentage basis, the Social Security Administration will obviously take a little bit more of your money out this year.
You may also want to adjust your withholding or ask the Social Security Administration to withhold money for the first time if you will be subject to taxes this year and you weren't in the past.
The unfortunate reality is that more retirees each year do get hit with federal taxes on their Social Security benefits. This happens because the thresholds at which benefits become taxable aren't adjusted due to inflation each year. As incomes naturally go up, more people end up with benefits above these thresholds that are frozen in place.
Since the COLA was so large this year and since many retirees may end up taking more money out of their savings to cope with rising prices, this could be a big issue for seniors in 2022. So if your provisional income is likely to go above the thresholds at which benefits become taxable, you need to plan for the added taxes you could owe.
Provisional income is half of Social Security benefits, all taxable income, and some non-taxable income. Once your provisional income hits $25,000 as a single tax filer or $32,000 as a married joint filer, know in advance that part of your benefits will be taxed.
Understanding both of these changes is crucial to financial planning for the year ahead. So when you get your first Social Security check in 2022, be on the lookout for them.
