When it comes to taxes and benefits, it’s essential to understand the difference between taxable income and earned income. Earned income, as defined by Social Security, includes gross wages and net self-employment earnings. Taxable income is a broader category, including not only earned income but also investment earnings, pension income (such as FERS), and other sources like lump sum leave payments.
What Qualifies as Taxable Income?
Taxable income encompasses everything the IRS includes in adjusted gross income (AGI) or sometimes modified adjusted gross income (MAGI). Higher AGI or MAGI can result in additional taxes and fees and may trigger “means tests,” which can reduce eligibility for certain government benefits or increase the cost of certain services.
How Higher Income Impacts Benefits
In several cases, high income can limit eligibility for government benefits. For instance, during the 2008 Great Recession, stimulus payments were only available to single filers with an income below $75,000 or joint filers under $150,000. Those earning above these thresholds were ineligible for the payments.
“Taxable income encompasses everything the IRS includes in adjusted gross income (AGI) or sometimes modified adjusted gross income (MAGI).”
Medicare Part B Premium Adjustments for Higher Incomes
Medicare Part B premiums have an income-related monthly adjustment. Higher-income individuals pay increased premiums, while those with incomes below certain thresholds pay the base premium. For 2024, monthly premiums range from $174.70 for single filers under $103,000 to $594.00 for those earning over $500,000. For joint filers, the base premium applies for incomes below $206,000, while those above $750,000 pay the highest rate of $594.00.
Reduced Deductions for High Earners
Before the 2017 Tax Cuts and Jobs Act, itemized deductions were phased out for taxpayers above specific income levels, limiting the tax benefits available to high earners. This change has since impacted the tax landscape, affecting the deductions high-income taxpayers can claim.
High Income and the Cost of Living
Higher-income individuals may face increased taxes and reduced benefits, but these financial impacts typically don’t offset the advantages of a higher income. For example, while a joint filer with an income over $750,000 may pay a $594.00 Medicare Part B premium, this cost is more manageable than the base premium for many average earners.
To develop a strategy to maximize your benefits and minimize your tax burden, get in touch with an FRC® trained advisor.
