Social Security update: The first day of the new year brought with it the customary changes in Social Security rules.

For those who are working, the covered wage ceiling will increase from the 1982 figure of $32,400 to a new maximum for 1983 of $35,700.

The Social Security tax rate of 6.7 percent each for employe and employer does not change. But for anyone who earned over the $32,400 ceiling in 1982 and expects to exceed the 1983 ceiling as well, Social Security tax will increase to $2,391.90 this year--$221.10 more than the 1982 ceiling of $2,170.80.

The new earnings ceiling also applies to the self-employed. Here, too, last year's tax rate of 9.35 percent remains unchanged. But the higher maximum means an increase in top self-employment tax from $3,029.40 to a new high of $3,337.95.

For retired people drawing Social Security benefits, the new year brings with it new and higher earnings limits. Starting this year a person who is 70 or older can earn any amount without affecting Social Security benefits. This provision is not "annualized"; that is, if you reach age 70 in 1983 the unlimited earnings rule does not apply to the entire year, but only starts with the month of your birthday.

Those who are 65 or older but under 70 may earn up to $6,600 a year without loss of Social Security benefits. The 1982 limit was $6,000. And the earnings ceiling increased from $4,440 last year to $4,920 for beneficiaries under the age of 65.

Speaking of Social Security, several alert readers pointed out a minor error I made in the Nov. 8 column about the need to pay Social Security tax for domestic employes. The quarterly report on Form 942 no longer requires names of employes for whom Social Security tax is being reported, but only the total wages paid and tax withheld. Names, Social Security numbers and dollar totals for the year are required only on the annual report.

The new year also brought with it a tax change important to all of you who are receiving regular pension or annuity payments.

The Tax Equity and Fiscal Responsibility Act of 1982 requires payers of a wide variety of taxable pensions and annuities to withhold income tax on such payments. Withholding is required on taxable distributions from pension, profit-sharing and stock ownership plans, IRA accounts and most commercial annuities.

Anyone receiving taxable distributions from any of these sources may elect not to have tax withheld from his or her payments, for any reason.

If you were retired, you should have been notified of this option by the payer of your pension, who should also have provided you with both a withholding certificate and a form to elect the waiver.

Should you fail to file either the exemption request or the withholding certificate indicating your tax status, withholding will begin with the first payment made after Dec. 31, 1982, based on an assumed status as a married person with three exemptions.

Question: Could you tell me if income is realized, and when, if a savings and loan association settles for $7,000 its 30-year, 6 percent mortgage with a balance of $10,000 and six years to go?

Answer: The mortgagor realizes $3,000 of ordinary income on the date the $7,000 payment is made and the mortgage is canceled. Any interest paid in advance must be prorated for income tax purposes over the life of the loan, so one might think that the $3,000 could be spread over the remaining six years. But this is not interest--it is cancellation of a part of the principal. And since the mortgage is paid up, there is no remaining life for proration. So the whole thing is reported as "other income" in the year of the transaction.