In addition to kicking off a new year, Jan. 1, 2021, ushered in several changes to programs and financial issues affecting seniors. The most notable is a slight increase in Social Security benefits, but there are several other important developments seniors and those planning for retirement should know about. We'll take a closer look at important changes you should be aware of in 2021 below!
1.3 Percent Increase to Social Security Payments
An increase to federal benefits will affect an estimated 70 million people, according to the U.S. Social Security administration. The increase (just over a percentage point) is small but reflects an uptick in the rate of inflation. Here's a look at the financial impact of the cost-of-living adjustment (COLA) for different types of beneficiaries:
|All retired workers||$1,523||$1,543||$20|
|All disabled workers||$1,261||$1,277||$16|
|Retired couple, both receiving benefits||$2,563||$2,596||$33|
|Widow/widower with two children||$2,962||$3,001||$39|
|Disabled worker or spouse with at least one child||$2,195||$2,224||$29|
Estimated average monthly Social Security benefit before and after 1.3 percent COLA by type of beneficiary.
In addition to the small adjustment, which equates to less than $250 per year for a typical retiree, there are some changes to the funding mechanism for Social Security benefits. The payroll tax, which provides the program's funding, will remain at the same rate, but the maximum taxable earnings will rise from $137,700 to $142,800. This figure has risen annually since 2016.
Earnings Test Limit Increases Slightly
Another change that impacts older adults who are drawing Social Security while continuing to work is a modest increase to the earnings test limit. This refers to the amount of income a recipient could earn before the government would begin withholding benefits.
In 2021, the limit for those drawing Social Security benefits who haven't yet reached full retirement age will rise to $18,960, up by nearly four percent from the 2020 limit of $18,240. Once recipients surpass that limit, the government will withhold one dollar of Social Security benefits for every two dollars they earn.
FYI: The full retirement age is 66 or 67 for most Americans, depending on the year they were born.
For those who will hit that magic age in 2021, the limit will increase to $50,520 from $48,600, and a $1/$3 ratio will apply. In other words, the government will withhold one dollar of Social Security benefits for every three dollars you earn. On the other hand, those who earn income after reaching their full retirement age will continue to face no earnings limit or withholding ratio.
Medicare Part B Premiums, Deductibles Climb
Though the increases were limited by federal legislation, both the monthly premium and annual deductible will rise on Medicare Part B plans, which pay for certain medical services not covered by Medicare Part A.
The standard premium for Part B plans will rise to about $149 per month, up from about $145 in 2020, although high earners will pay more.1 The annual deductible will move to $203 from $198 in 2020.
Gift Exclusion Remains Level, Lifetime Limit Rises Slightly
Continuing levels in place since 2018, an individual can give up to $15,000 to anyone they choose, while a couple can give up to $30,000 without tax implications. These levels apply to any combination of cash or assets.
However, the estate and gift tax exemption will rise by $120,000 (to $11.7 million from $11.58 million). This figure refers to the lifetime limit that applies on estate or gift taxes, and couples filing jointly can shield as much as $23.4 million in estate and gift taxes.
Standard Tax Deduction Inches Up
Standard deduction amounts taxpayers of any age can claim will continue moving up in 2021. The standard deduction for individuals for tax year 2021 (the returns you'll file next year) is $12,550; for heads of households, it is $18,800; and for married couples filing jointly, it is $25,100. That reflects an increase of $150 per individual over the level for the 2020 tax year (returns you'll file this year).
Quick Tip: Whether you choose the standard deduction or you plan to itemize deductions, there are several ways older adults can reduce their tax bills. Head to our guide to tax credits and deductions for seniors to learn how to minimize your tax burden.