November 3, 2020 10:51 pm

Social Security Changes for 2021

More than 70 million Social Security beneficiaries will receive a cost-of-living adjustment (COLA) of 1.3% starting with the December 2020 benefits, which are payable in January 2021. This COLA adjustment is less than the 1.6% increase last year (Social Security Administration Press Release and Fact Sheet, 10/13/20;

However, for many Social Security recipients, the net benefit of the 1.3% COLA will be reduced by an increase in Medicare Part B premiums. The basic Part B premium for 2021 is estimated to be $153.30, up from $144.30 in 2020, but under a short-term spending bill from Congress, the increase is limited to 25% of what it would otherwise have been. Because of the spread between the increase in Social Security benefits and Medicare premiums, millions of Social Security beneficiaries will be “held harmless”, meaning they will pay a slightly lower monthly premium to keep the increase in their Part B premium from exceeding the increase in their Social Security benefits.

Along with the 1.3% benefits COLA comes an increase in the maximum amount of earnings subject to the 6.2% Social Security tax. For 2021, earnings up to $142,800 are subject to the tax, up from $137,700 in 2019. This means that employees who earn wages of $142,800 or more in 2021 will have the maximum Social Security tax of $8,853.60 (6.2% x $142,800) withheld from their wages ($316.20 more than in 2020); the employer pays the same amount as the employee.

Self-employed individuals will figure their 2020 self-employment tax (Schedule SE) by applying the Social Security tax rate of 12.4% (6.2% employer share plus 6.2% employee share) to their first $142,800 of net earnings, but this is after the net earnings are reduced by 7.65%.

All wages, regardless of amount, are subject to the 1.45% Medicare tax withholding rate, and on Schedule SE, all self-employment net earnings (after the 7.65% reduction) are subject to the 2.9% Medicare tax (employer and employee shares). The $142,800 ceiling applies only to Social Security tax, not Medicare. In addition, employees and self-employed individuals with earned income over $200,000, or $250,000 if married filing jointly ($125,000 if married filing separately), must pay Additional Medicare Tax of 0.9%.

Social Security earnings limit. For benefit recipients who are under the full retirement age for all of 2021, benefits will be reduced by $1 for every $2 of earnings over $18,960 (it was $18,240 in 2019). For recipients who attain the full retirement age during 2021, benefits will be reduced by $1 for every $3 of earnings over $50,520 (it was $48,600 in 2020), but only the earnings in months prior to the month of attaining full retirement age are counted. There is no benefit reduction for earnings starting in the month that the full retirement age is reached. A more favorable rule generally applies if 2021 is the first year of receiving benefits. If it is, and if the recipient will not reach the full retirement age until after 2021, there generally will be no benefit reduction for any month in which 2021 earnings do not exceed $1,580, or 1⁄12 of the full-year limit of $18,960. If age 66 will be reached in 2021, there will be no benefit reduction for any month prior to the month of attaining the full retirement age and in which earnings do not exceed $4,210, or 1⁄12 of $50,520. However, the favorable “first year” rule does not apply for a month in which the recipient is self-employed and devotes either more than 45 hours to the business or between 15–45 hours in a highly skilled occupation. Keep in mind that if benefits are reduced because of the earnings limits, they are added back to the benefits received after reaching full retirement age.

Tax Glossary

Gift tax

Gifts in excess of an $12,000-per-donee annual exclusion are subject to gift tax, but the tax may be offset by a gift tax credit.

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