8.7% which will be a monthly increase of $240 for the average recipient, or $2880 per year. Medicare premiums also look to go down slightly, so the net check will be increased by that as well, though that doesn't affect the taxability of Social Security. All this is on top of the nice 5.9% increase in 2021.
But of course there is a catch...and you need to be aware of it - the raise means there is a higher chance that your Social Security will be subject Federal income tax, and, if it is already subject to tax, more might now be taxed.
First some history: Until 1984, Social Security was completely tax free. Starting in 1984, up to 50% of your Social Security was subject to tax. In 1993, a formula was created that subjected as much as 85% of your Social Security check to federal taxes. The rationale for these decisions was complicated, and beyond the scope of this post. What is important was that they selected two levels of income, $32,000 for joint filers and $25,000 for other filers as the "base amount" below which Social Security would not be taxed. More on how to compare your income with that number later. The important thing is that those numbers HAVE NOT CHANGED SINCE 1993! This means that any increase in Social Security payments comes with a potential increase in taxes due, and, the bigger the increase, the bigger the tax increase.
So how do they figure this crap out? First, you take half of your Social Security received for the year (before any deductions). Then you add virtually ALL other income, including tax free interest (such as from municipal bonds or mutual funds investing in them - a lot of retired persons will have some of this). If that total is above $32,000 for Married Joint Filers, or $25,000 for others, Some of your Social Security will be taxable - up to 85%. It gets there fast as well. If you file Married Filing Separately and did not live apart from your spouse the entire year, 85% of your Social Security will likely be taxable right away. As you can see, changes in income can really mess up your taxes if you are in the range where less than 85% of your Social Security is taxed. Working a separate job, selling stocks for a gain or taking more out of a retirement account all create taxable income just by their nature, but combined with their affect on Social Security, the effect is multiplied. It is important to work with a good tax advisor if you are in this situation. Paradoxically, being above the income threshold where 85% of your Social Security is already taxed adds a nice level of stability to your tax life.
Here are some examples. I'm going to give the scenario of a person or couple's tax situation in 2021, where they receive Social Security and a pension, and nothing else. I'll give taxable amounts of Social Security for 2021, then 2022 based on the Social Security raise of 8.7%, without an increase in pension, and then add in a very modest 5% increase in pension, which is probably conservative, so you can see the combined affect.
1. Single individual with Social Security of $2500/month and pension of $2500 per month in 2021. Taxable Social Security is $13,850. 2022 taxable Social Security with just the 8.7% Social Security raise: $14,959. With an additional 5% pension raise: $16,234. Keep in mind that the pension increase also increases taxable income.
3. Married couple filing Jointly with combined Social Security of $6000/month and pension of $4000 per month in 2021. Taxable Social Security is $40,000. 2022 taxable Social Security with just the 8.7% Social Security raise: $42,622. With an additional 5% pension raise: $44,702. Keep in mind that the pension increase also increases taxable income.
As you can see, the Social Security increase adds quite a bit to taxable income, but other income increases have a more dramatic affect. Again, reach out for tax advice if you are receiving Social Security and have changes in income sources.
Also note that this is just a bare bones overview of Social Security taxes. It is not intended to be definitive on the subject. Be aware that most states do not tax Social Security, but some do.