Social Security recipients will see bigger payments this year for the first time since 2009. But the future of Social Security taxes for workers remains uncertain. The 2011 payroll tax holiday has been extended only through the end of February and is scheduled to increase in March under current law. Here's a look at the Social Security changes workers and retirees will experience this year.
[See 10 Ways to Boost Your Social Security Checks.]
A boost in monthly payments. Social Security payments for more than 60 million Americans will increase 3.6 percent in 2012, the first increase since 2009. The typical retiree will see an increase of about $43 per month, although a portion of the increase may be deducted to pay for higher Medicare Part B premiums. Since 1975, Social Security payments have been automatically adjusted each year for inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Cost-of-living adjustments have ranged from 14.3 percent in 1980 to zero in 2010 and 2011.
Higher Social Security tax cap. The maximum amount of earnings subject to Social Security taxes has increased from $106,800 in 2011 to $110,100 in 2012. The Social Security Administration estimates that about 10 million high earners will pay higher taxes as a result of the increase in the taxable maximum.
[See 10 Things You Didn't Know About Social Security.]
Social Security tax holiday temporarily extended. The 2 percent payroll tax cut that workers received in 2011 was recently extended through the first two months of 2012 by the Temporary Payroll Tax Cut Continuation Act of 2011. Nearly 160 million workers will continue to have 4.2 percent of their pay deposited into the Social Security trust fund instead of the usual 6.2 percent until Feb. 29, 2012.
However, higher-income employees who earn more than $18,350 in January and February 2012 must pay a 2 percent Social Security tax on the amount they earn between $18,350 and $110,100. "This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions," according to a statement from the IRS. "The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year." Under current law, Social Security taxes are scheduled to return to 6.2 percent of pay in March 2012.
[See 5 Things to Know About the Payroll Tax-Cut Extension.]
Higher earnings limits. Early retirees who work and collect Social Security benefits at the same time can earn $480 more next year before a portion of their Social Security benefit will be temporally withheld. Social Security recipients below their full retirement age (66 for those born between 1943 and 1954) can earn up to $14,640 in 2012, above which 50 cents of each dollar earned will be withheld from their Social Security payments. For retirees who will turn 66 in 2012, the limit climbs to $38,880, after which 33 cents of each dollar earned will be deducted from monthly payments. Starting the month you turn your retirement age, there is no penalty for working and collecting Social Security benefits at the same time. At that time, your benefit will also be adjusted to reflect your continued work record and any benefits that were withheld.
[See 12 Ways to Fix Social Security.]
Maximum possible benefit grows. The maximum possible Social Security check will grow to $2,513 per month in 2012, up from $2,366 in 2011. To get this amount, a worker would need to earn the maximum taxable amount ($110,100 in 2012) every year after age 21.
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