A HIGHER TAX CAP AND OTHER BIG CHANGES IN STORE FOR SOCIAL SECURITY IN 2017
The Social Security Administration (“SSA”), in its annual mid-October press release, announced some important changes to America’s most important social program for 2017, not the least of which is a bump in the earnings limit that will be subject to social security tax.
Increase in Earnings Limit
In 2017, employers, employees and the self-employed will be hit with the largest increase in social security taxes seen in years, as the SSA has raised the maximum earned income limit to $127,200, up from $118,500 in 2016. This represents the maximum amount of earned income, in the form of wages or self-employment income that is subject to the 12.4% tax (6.2% each for employers and employees, the full 12.4% for the self-employed) that funds the Social Security program. This could cost employers and employees an extra $539 each for 2017 ($1,079 for the self-employed) if earnings reach the new threshold. Approximately 12 million taxpayers are expected to pay more in 2017, whereas those earning less than $118,500 will see no change.
Earning Social Security Benefits Just Got a Little Harder
Most taxpayers need to work at least part time for ten years to qualify for Social Security benefits upon retirement. Based on the formula established by the SSA, earners need to accrue forty lifetime work credits at a maximum rate of four per year. In 2016, one credit equated to $1,260 in earnings for a max annual work credit limit of $5,040. In 2017, however, the SSA increased the value of one work credit to $1,300, meaning that you will now need to earn $5,200 to accumulate the four credits.
A Modest Increase in Benefits
On an annual basis, perhaps the most anticipated SSA decision affecting the 60 plus million Social Security beneficiaries is whether the benefits received are going to keep pace with inflation in the coming year. Annual cost-of living adjustments (“COLA”) are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (“CPI-W”). The COLA increase in benefits mirrors the CPI-W, while CPI-W decreases cause benefits to remain unchanged.
For 2017, COLA is set to be raised by .3%, or about $5 per recipient per SSA estimates. While this is the lowest increase on record, there was no increase in 2016, so this equates to .3% over two years. The 2017 average monthly benefit for retirees is expected to be $1,360 ($1,355 in 2016) and $2,260 for retired couples ($2,254 in 2016).
Increase in the Benefit Earnings Limit
Retirees who continue to work while collecting Social Security in 2017 will see the earnings limit increase to $16,920 from $15,720 in 2016 for those 65 and younger. Social Security beneficiaries who earn more than this amount will temporarily have $1 in benefits withheld for every $2 in earned income over the limit until they reach age 66.
The earnings limit increases by $3,000 to $44,880, for those who will turn 66 in 2017 and the payment reduction lowers to $1 withheld for every $3 earned in excess of the earnings limit.
Once you turn age 66, however, Social Security payments are no longer withheld if you work and receive benefits at the same time. In addition, any temporary reduction in payments discussed above will be restored to give you credit for any part of your benefit that was withheld.
A Boost in the Maximum Possible Benefit
Those who retired at the full retirement age of 66 and who previously earned enough in their lifetime to be entitled to the maximum monthly benefit will be happy to know that it will rise to $2,687 for 2017 ($32,244 annually), an increase of $48 a month (the max actually decreased in 2016). Also, as in the past, you may be eligible for a higher amount if you delay your benefits until after full retirement age.
Retirees who have earned the max benefit are most likely to have a portion of their Social Security benefits subject to federal income tax if combined income exceeds $25,000 for single filers and $32,000 for couples.
Other Notable Changes in Benefits
Full retirement age is slated to increase for new retirees – For senior born between 1943 and 1954, the full retirement age remains at 66 years. Beginning in 2017, however, for those born in 1955 and subsequent years, the SSA has inserted a two month increment, meaning that their new retirement age is 66 years and 2 months. The two month increase is added with each successive year, reaching 67 years for those born in 1960 and later. This may increase the reduction for those claiming benefits before full retirement age.
Disability thresholds have increased – The monthly earned income thresholds for qualifying for blind and non-blind disability benefits are set to increase in 2017 to $1,950 ($1,820 in 2016) and $1,170 ($1,130 in 2016), respectively. These are the threshold amounts that disabled individuals may earn and still qualify for benefits.
Dependents can no longer continue to receive benefits if beneficiaries suspend payments – The SSA allows Social Security beneficiaries to voluntarily suspend their benefits between ages 66 and 70 to earn delayed retirement credits that will increase benefits when payments are resumed. A new rule that applies to benefit suspensions requested on or after April 30, 2016 will also suspend payments to family members that are based on your work record during the period of the benefit suspension. This new rule, however, does not apply to divorced spouses, who can continue receiving a divorced spousal benefit if the ex-spouse suspends his or her retirement benefit.
No more spousal double switches – Until recently, dual-earner married couples age 66 or older had the option of collecting spousal benefits at 50% of the higher earner’s benefit amount, and then later switching to a higher payment based on their own work credits due to delaying their claim. This option will no longer be available to those who turn 62 on January 2, 2016 or later. Married retirees will now receive the higher of the two benefit options and can no longer claim both benefit types at different times.
If you have questions, please contact Victor C. Belgiorno at 516-861-3704 or VBelgiorno@dsjcpa.com.