The 2023 increases in Social Security benefits could mean that some of the beneficiaries could end up with a higher tax bill for the 2024 tax season.
In 2023, Social Security benefits were raised by 8.7 percent to compensate for the increase in cost of living, with the average retired worker receiving $1,827 a month instead of $1,681, which they got in 2022. Senior citizens who have never paid taxes on their Social Security benefits may now be required to pay taxes as the higher Social Security benefits push them into the taxable category.
Here is why:
Beneficiaries need to pay taxes on their Social Security income if the combined income—the sum total of 50 percent of Social Security benefits (box 5 on your SSA-1099) plus all other income, including tax-exempt interest—exceeds certain thresholds. These are the rules for taxation:
- Individual taxpayer: If combined income is between $25,000–34,000, then up to 50 percent of the Social Security benefits may be taxable. However, if the income is greater than $34,000, up to 85 percent could be taxed.
- Married couples filing jointly: Up to 50 percent of Social Security income will be taxable if the combined income is between $32,000–44,000. This jumps to 85 percent if it exceeds $44,000.
For instance, an individual collecting $2,000 in monthly Social Security income will receive $24,000 in annual benefits, out of which 50 percent or $12,000 will be used for calculating combined income.
- If the individual makes $10,000 in extra income annually, the combined income will be $12,000 + $10,000 = $22,000. Since this is less than $25,000, no part of Social Security benefits would be taxed.
- If the extra annual income comes to $20,000, then the combined income would be $12,000 + $20,000 = $32,000, bringing it in the range of $25,000–34,000. As such, up to 50 percent of the Social Security income could be subject to taxes.
- If the person makes $30,000 in extra annual income, the combined income would be $42,000, meaning up to 85 percent of Social Security benefits may be taxed.
Keep in mind that the 50 percent and 85 percent rates are not taxes but the portion of the Social Security income that will be subject to taxation at the standard tax brackets you are in.
The Internal Revenue Service states that “If you’re married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring the taxable portion of your benefits. Even if your spouse didn’t receive any benefits, you must add your spouse’s income to yours when figuring on a joint return if any of your benefits are taxable”.
The low combined income thresholds have faced criticism as many retirees could end up paying a sizable portion of their benefits as taxes. According to the Social Security Administration (SSA), around 40 percent of beneficiaries have to pay income taxes on their Social Security receipts.
In an interview with Yahoo Finance, Mary Johnson, a Social Security and Medicare policy analyst for The Senior Citizens League, said that they “expect more beneficiaries to become liable for federal income taxes on their Social Security benefits for the first time in the upcoming 2024 tax season.”
A survey conducted by the group found that as many as 26 percent of the respondents who received Social Security for over three years reported paying taxes on a portion of these benefits for the first ever time during the 2022 tax year. The organization also pointed out that the income thresholds of Social Security subject to taxation have never been adjusted for inflation.
In addition to the federal income tax, retirees may also have to pay state taxes on their Social Security. Such taxes are levied by 12 states this year and are usually determined by the taxpayer’s age and income level.
The 12 states that tax Social Security benefits are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.