- In 2024, high earners may pay more Social Security taxes.
- Additionally, there may be consequences if you work while receiving retirement benefits.
- Here’s what you should know.
Dardespot | E+ | Getty Images
Social Security recipients are expected to see an increase in their benefits next year based on a 3.2% cost of living adjustment.
However, there are several thresholds that workers should be aware of, based on new 2024 numbers recently announced by the Social Security Administration.
If you are a worker hoping to eventually become eligible for retirement benefits, or if you work and also receive retirement benefits, here’s what you need to know.
The maximum taxable income for Social Security will increase to $168,600 in 2024, up from $160,200 in 2023.
Employees pay a tax of 7.65% of their salary for Medicare and Social Security, also known as FICA, which stands for Federal Insurance Contributions Act. Self-employed people pay 15.3% to cover employee and employer contributions.
This 7.65% includes 1.45% that goes to Medicare and applies to all income. Higher earners can pay a surcharge of 0.9%.
The remaining 6.2% is for Social Security and only applies to the maximum taxable amount, or $168,600, for next year.
According to the Social Security Administration, about 6% of workers who pay Social Security taxes have income above the taxable maximum each year.
By paying taxes to Social Security, you may be able to receive benefits in retirement.
In general, you need at least 10 years of work or 40 credits to qualify. You can earn up to four credits per year.
The amount of earnings required for a Social Security credit will be $1,730 in 2024, up from $1,640 in 2023.
If you become eligible for Social Security between age 62 and your full retirement age, your benefits will be reduced due to early retirement.
If you continue to work, you may be subject to the so-called pension earnings test above a certain limit.
In 2024, earnings exempt from the retirement income test will increase to $22,320, up from $21,240 this year. For every $2 in earnings above this limit, $1 in benefits will be withheld.
The good news is that these withheld benefits will be applied to your monthly benefits once you reach full retirement age.
“It’s worth checking the low-income threshold for a married woman [two-earner] budget,” said Joe Elsasser, a certified financial planner and president of Covisum, a provider of Social Security application software.
More from Personal Finance:
Social Security’s cost of living adjustment will be 3.2% in 2024
Lawmakers are targeting credit card debt, interest and fees
Open enrollment in Medicare can help reduce healthcare costs
That low-income worker might be able to continue working and receive his full Social Security benefit without facing a penalty, he said.
It is important that a different earnings threshold applies for the year in which you reach full retirement age.
In 2024, that amount will rise to $59,520 for the months before you reach your full retirement age, compared to $56,520 this year. In the year you reach full retirement age, $1 in benefits will be withheld for every $3 in earnings above the limit.
According to Elsasser, the earnings test is an important factor when deciding whether to withdraw pension benefits early.
The new higher threshold — nearly $60,000 — for the year you reach full retirement age also presents an opportunity, he said.
For example, if you reach full retirement age in July, you might be earning about $10,000 a month before your birthday and not be subject to the earnings test if you start receiving benefits on Jan. 1, Elsasser said.
Income from Social Security benefits may be subject to federal tax.
The tax rate for this income depends on your total income. This is calculated by adding half of your benefits to your adjusted gross income and tax-free interest.
You can pay taxes on up to 50% of your benefits if your total income is between $25,000 and $34,000 for single taxpayers or between $32,000 and $44,000 for married couples filing joint returns.
Up to 85% of your benefits may be taxable if your total individual income is more than $34,000 and you file individually, or if you are married and have more than $44,000.
Remarkably, these thresholds do not change from year to year. However, as benefit income increases each year due to cost of living adjustments, more of it becomes taxable over time.
More beneficiaries could be subject to federal income tax on their benefit income next April due to the 8.7% cost of living adjustment for 2023, according to a study by the Senior Citizens League. The nonpartisan seniors’ group advocates that the tax thresholds be updated and adjusted annually so that seniors do not have to pay as much tax on their performance income.
“Certainly taxation has become a growing problem,” said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League.