Social Security is one of the most impactful social programs in the country. However, it’s not always the easiest program to navigate for retirees.
One thing I hear retirees complain about consistently is the constant changes in Social Security. From adjustments to eligibility to thresholds, nothing ever seems to be set in stone. To help cut through some of the noise, retirees should prioritize focusing on a few key updates each year. Here are three things retirees should know about Social Security as we enter 2024.
All it takes is a look around any retail store to see the effects of inflation. Inflation can significantly diminish the purchasing power of Social Security recipients and others on fixed incomes. Imagine receiving $1,000 monthly in Social Security payments 10 years ago and today. That $1,000 wouldn’t go nearly as far now as it did then.
To combat this, nearly every year, the Social Security Administration implements a cost of living adjustment (COLA). This is meant to keep the purchasing power of Social Security benefits relatively stable despite inflation. Social Security uses the amount that the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) rose during the previous year’s third quarter to determine how much benefits will be increased.
The Social Security COLA for 2024 is 3.2%, so recipients can expect their benefits to increase by that much. If your gross benefit before deductions for things like Medicare premiums was $1,000 in 2023, you can expect it to go up to $1,032 this year.
There’s a 12.4% Social Security tax on your earnings. For employees, employers pay half of that, while the other half is deducted from people’s paychecks. If you’re self-employed, you must pay the full 12.4%. However, not all earnings are subject to Social Security taxes.
The wage base limit is the ceiling on how much of your earnings are taxed for Social Security each year. In 2024, the wage base limit is $168,600. Any amount earned above that is not subject to the Social Security wage tax.
Like monthly benefits, the wage base limit is adjusted for inflation annually. For perspective, the wage base limit was $160,200 in 2023 and $117,000 a decade ago in 2014.
Knowing the wage base limit is important because your income may stay the same while the wage base limit increases, which could affect your tax bill. If you earned $170,000 in 2023, $9,800 was not subject to Social Security taxes. If you earned $170,000 this year, only $1,400 would be exempt.
The number of states that tax Social Security is getting smaller by the year, but there are 10 still holding on after Nebraska and Missouri stopped taxing benefits at the start of 2024:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
The specific rules regarding who’s eligible to get taxed and how much vary by state, so it’s important to check your respective state’s rules. For example, Colorado retirees over 65 can deduct all of their federally taxed Social Security. Retirees 64 and younger can deduct up to $20,000 of Social Security benefits from their taxable income.
However, Social Security recipients in Connecticut can deduct 100% of their federally taxable Social Security income if their adjusted gross income (AGI) is below $75,000 for single filers and $100,000 for married couples filing jointly.
Regardless of your state’s tax rules, federal tax rules apply to everyone. Most people won’t pay taxes on their Social Security benefits, but it’s better to check and know for sure in advance so you don’t get blindsided by an unexpectedly high tax bill later.
