The new year will bring major changes in Social Security for the 120 million workers subject to the Social Security payroll tax and approximately 37 million retired or disabled people who receive monthly benefits through it.
* Payroll taxes will go up.
* Monthly benefits will rise.
* The amount a retired person may earn without loss of benefits will rise.
* Medicare premiums and patient payments of various types also will go up.
* Up to half the Social Security benefits paid to any person, starting with benefits received in 1984, will become subject to federal income taxes for the first time, but only if the person's total income -- as defined in a special law -- exceeds $25,000 in the case of a single person and $32,000 for a married couple filing jointly. About 10 percent of the 37 million beneficiaries are expected to exceed the threshold.
The following is a rundown of major rules and changes governing Social Security and Medicare for 1985, as they affect workers and beneficiaries.
Payroll Taxes. For workers in jobs covered by Social Security, the Social Security payroll tax, which was 6.7 percent in 1984, will rise on Jan. 1 to 7.05 percent. The tax will be payable on wages up to $39,600 for the year. In 1984, the tax was payable on wages up to $37,800. For a worker making $20,000, the increased tax rate would mean a rise in total Social Security taxes for the year to $1,410 from $1,340.
For workers earning the maximum taxable amount, the new rules will mean a payroll tax for the year of $2,791.80 in 1985 -- compared with a maximum of $2,532.60 in 1984.
The net tax rate for self-employed persons will rise from 11.3 percent in 1984 to 11.8 percent in 1985. This rate, combined with the new wage base of $39,600, means that self-employed persons with maximum taxable earnings will pay $4,672.80 in 1985, up $401.40 from 1984. Benefit Increases
Social Security beneficiaries on the rolls as of December 1984 will receive a 3.5 percent increase in benefits, starting with checks received Jan. 3.
For a worker who retired in 1984 at age 65 and was entitled to the maximum monthly benefit of $703, this change will mean a boost to $728 starting with the January check. (Workers who retired in earlier years sometimes have maximum benefits that are higher because the benefit formula for new retirees was lowered through amendments enacted in 1977.) Payments to the average retiree are less than $728; for the average retired worker, whose 1984 benefit is $434, the 3.5 percent increase will boost the benefit to $449 in 1985. New Retirees
Any person who is at least 62 years old in 1985 and who has worked at least 34 quarter-years in his lifetime at a job subject to the Social Security tax, is entitled to retire and receive a Social Security monthly benefit. The amount of benefits is based on the individual's level of earnings subject to the Social Security tax over his working lifetime.
Persons who do not have a sufficient earnings record to get benefits on their own can nevertheless receive a spouse's benefit, provided the husband or wife is entitled to benefits on the basis of his or her earnings record and is drawing benefits. The spouse's benefit adds an extra 50 percent to the primary retiree's benefit if the spouse is 65 or over, but a bit less if the spouse is between 62 and 65.
In cases where an individual is entitled to a benefit on the basis of lifetime earnings and to a spousal benefit, he gets whichever is greater.
For persons who retire at 65 in 1985 and are entitled to the maximum benefit, the monthly benefit will be $725. If that person had a spouse who is at least 65 and is entitled to the spouse's benefit, the two would receive an added 50 percent for a total of $1,087.
Workers entitled to benefits on their own earnings records who choose to seek benefits some time between age 62 and 65 must take a reduced benefit. If the person retires at 62, the benefit is 20 percent less than if he waited until 65, but the closer to 65, the smaller the reduction. Divorced Persons
Starting in 1985, there is a new provision for divorced spouses. In the past, a divorced woman, for example, could get a spouse's benefit if she had been married at least 10 years to her former husband, but only if he had retired and started receiving benefits of his own. This created severe problems in cases where the partner with an adequate earnings record did not retire; the ex-spouse could not get any benefit. Starting in 1985, this will change. Even if the partner with the earnings record is not retired, the ex-spouse can receive the benefit if they both are at least 62, were married 10 years, have been divorced at least two years and the benefit earner is entitled to retire based on his earnings record.
Incidentally, receipt of spouse's benefits by a former spouse does not take anything from a current spouse. Each could receive a spouse's benefit, although the current spouse would have to wait until the benefit earner retired. Earnings Permitted
There is no needs test for receipt of Social Security benefits; they go to rich and poor alike. However, there is an earnings test to determine whether a person has retired or is still working. In general, the idea is that a person should be able to have relatively small annual earnings without losing retirement status.
In 1985, Social Security retirees under age 65 will be allowed to earn annual wages of up to $5,400 without reduction of benefits. This figure has been increased from $5,160 in 1984.
Those age 65 to 69 will be allowed to earn up to $7,320, up from $6,960.
Above these amounts, benefits are reduced $1 for each $2 earned.
There is no limit on earnings of those 70 and over.
For the purposes of this earnings limitation, only wages from employment (including self-employment) are counted. Income from stocks and bonds and interest and other pensions are not counted. Medicare Changes
People receiving Social Security benefits are also entitled to received Medicare, provided they are age 65 or over or have been receiving Social Security disability for at least 24 months. Medicare has two parts: hospital insurance (Part A) and doctor insurance (Part B). Receipt of hospital-insurance benefits is automatic, and no premium is charged for it. However, receipt of Part B benefits is optional and requires payment of a monthly premium. A retired person automatically is deemed to have opted for Part B unless he takes steps to opt out. Virtually all retirees choose to stay in Part B. The premium for those in Medicare Part B is automatically deducted each month from the basic Social Security monthly benefit.
On Jan. 1, the monthly premium will rise from $14.60 to $15.50.
In addition, certain out-of-pocket charges that the Medicare patient must pay will increase.
At present, when a Medicare patient is hospitalized, he must pay $356 for the first day. This will rise to $400 in 1985. From the 61st through the 90th day of a hospital stay, the patient's share will increase from $89 a day to $100. There will be other increases as well. Taxation of Benefits
In 1983, Congress and the president agreed that starting with tax year 1984, up to half the Social Security benefits received by any person would be subject to federal income tax, provided that person's annual income -- as figured in a special calculation -- exceeded $25,000 for a single person or for a married person filing separately who lived apart from his spouse the entire year and $32,000 for a married couple filing jointly. (For married couples who file separately and lived together at any time during the year, up to half the benefit is taxable if income exceeds zero.)
On Jan. 4, the Social Security Administration will start mailing forms marked SSA-1099 to all the people who received Social Security benefits during 1984. Each form will show total benefits received during the year and will note how much of that amount was deducted by Social Security to cover Medicare premiums, repayment of prior overpayments and so forth.
Those with questions about the information on the form may call Social Security's 24-hour, toll-free number after Jan. 4. The number is (900) 200-1099 in the District of Columbia, or in some areas, 1 (900) 200-1099.
In determining whether one meets the income test, the beneficiary totals not only ordinary income as calculated in the past for the adjusted gross income line of the federal income tax form but all tax-free interest from municipal bonds plus one-half the Social Security benefit.
This total is used to determine whether the Social Security benefit is taxable at all.
Once that is determined, tax-free interest is excluded from further calculations. And if Social Security is eligible for inclusion, the rule is that half the benefit or half the total in excess of the threshold is counted, whichever is less. Sample Calculations
Here are examples of these calculations:
* A single man has adjusted gross income of $13,000, not counting tax-free interest or Social Security. Under previous law, no Social Security income or tax-free interest would be added to this.
Assume, however, that the individual had $1,000 in tax-free interest plus $6,600 in Social Security benefits. Under the new law, the taxpayer is required to make this computation:
Add normal adjusted gross income ($13,000) plus tax-free interest ($1,000) plus one-half the $6,600 Social Security benefits ($3,300). Total: $17,300.
This total is less than the $25,000 threshold for a single taxpayer. Therefore, final adjusted gross income remains $13,000. No tax-free interest or Social Security benefits are counted when the individual makes out his federal income tax.
* A single woman has adjusted gross income of $20,000 for 1984. Under previous law, that would be her basic income for federal income tax purposes. She has $3,000 in tax-free interest income from municipal bonds plus $7,600 in Social Security benefits.
Under the new law, she would add her adjusted gross income ($20,000), plus her tax-free interest ($3,000) plus half her $7,600 benefits ($3,800). Total: $26,800. This is $1,800 over the $25,000 threshold to determine if any of her Social Security benefit is taxable. The amount taxable is either half the benefit or half the excess over the threshold, whichever is less. In this case, the latter is less, so the portion of the Social Security benefit that is taxable is $900.
To find the new adjusted gross income to be used in actual tax calculations, ignore tax-free interest and add normal adjusted gross income ($20,000) to the portion of Social Security that is taxable ($900). The $20,900 total is the adjusted gross income figure to be used on federal tax forms.
* A couple filing jointly has normal adjusted gross income of $20,000. Under previous law, that is their basic income for tax purposes. However, they also have tax-free interest of $2,000 and $10,000 in Social Security benefits.
Under the new law, they add $20,000 plus $2,000 plus $5,000 (one-half the Social Security) benefit for a total of $27,000. This is less than the $32,000 threshold that is used to determine if any portion of the Social Security benefit is taxable. Adjusted gross income for tax purposes remains $20,000.
* A couple filing jointly has adjusted gross income of $25,000. Under the old law, that is their basic income for tax purposes. Assume they also have $4,000 in tax-free municipal bond interest and $11,400 in Social Security benefits.
Under the new law, they add $25,000, plus $4,000 plus $5,700 (half the Social Security benefit) for a total of $34,700. This is $2,700 higher than the $32,000 threshold. The amount of the benefit that is taxable is half the benefit or half the excess over the threshold, whichever is less. In this case, the latter is less; half the excess is $1,350.
To find new adjusted gross income to be used in actual income tax calculations, they add old adjusted gross income -- $25,000 -- to the $1,350 and ignore tax-free interest. Their adjusted gross income for actual tax purposes is $26,350.
* A married couple filing jointly has normal adjusted gross income of $34,000, plus $7,000 in tax-exempt interest and $12,600 in Social Security benefits.
To determine if any of their Social Security benefit is taxable, add $34,000, plus $7,000 plus $6,300 (half of Social Security). Total: $47,300 -- which exceeds the $32,000 threshold by $15,300. The portion of Social Security that is taxable is half the total Social Security benefit or half the excess over the threshold, whichever is lower. In this case, half the benefit is lower, $6,300.
Under the new law, the adjusted gross income for tax purposes is $34,000 plus $6,300, or $40,300.