Although it may come as a surprise for many seniors, Social Security benefits are sometimes taxed on the federal level. In fact, seniors lose billions of dollars each year due to the taxes they owe on their retirement benefits. And the amount they’ll have to pay will be much higher in 2022.
In fact, according to The Senior Citizens League, retirees will collectively pay an extra $10.5 billion in taxes on their retirement benefits in 2022 compared to the amount paid in 2021. That is based on the 2021 Social Security Trustees Report, indicating that the program will collect more than $45 billion in revenue in 2022, up from $34.5 billion in 2021.
Seniors will owe a lot more in Social Security taxes in 2022
According to The Senior Citizens League, there’s one big reason retirees will pay more than $10.5 billion in additional Social Security taxes in 2022 than they owed the year prior.
“That big jump is primarily due to the rising number of new retirees with higher incomes,” Mary Johnson, a Social Security analyst for The Senior Citizens League, said in a press release. It “does not factor in the impacts of the 5.9 percent cost-of-living adjustment received in 2022 because that affects taxes paid in the 2023 tax season.”
Now, it’s important to note that some of this increase in revenue can be attributed to the post-pandemic recovery. In 2020, for example, Social Security collected around $39 billion in taxes but this number fell in 2021, as incomes were lower due to the financial consequences of COVID-19. But, even an increase from $39 billion to $45 billion is substantial.
To understand why seniors must pay so much more in 2022, it’s important to take a look at both how Social Security benefits are calculated and how they are taxed.
Why will so much more revenue be collected on retirement benefits?
Based on the way Social Security was designed, retirees receive benefits that replace about 40% of their pre-retirement earnings.
Over time, earnings increase due to wage growth. People seeing their incomes go up doesn’t necessarily mean they will all have more buying power, though. The price of goods and services increases along with wages. And unless income increases outpace inflation, workers could end up with more money on paper than can buy the same amount as their previous lower wages did.
Since earnings collectively increase over time and Social Security benefits are based on average earnings, each new group of seniors typically has a slightly higher retirement income than those who came before them. And this affects whether they are taxed on benefits.
See, a retiree’s provisional income determines whether they’ll pay taxes on Social Security benefits — as well as what percentage of their benefits will be taxed. Specifically, it’s provisional income that matters. That’s calculated by adding up half of Social Security benefits, all taxable income, and some nontaxable income.
Now, the fact that seniors’ provisional incomes go up over time wouldn’t matter in terms of taxation of benefits if the thresholds at which taxes are assessed increased due to inflation. Unfortunately, the threshold at which Social Security becomes taxable doesn’t change over time.
Since the government first began taxing benefits, the level at which benefits become subject to these taxes has always been set at $25,000 for single tax filers or $32,000 for married joint filers. Since a growing number of seniors exceed these limits each year due to natural wage growth, the result is that the federal government takes a lot more money from seniors each year — $10.5 billion more in 2022.
Older Americans need to be aware that a growing number of retirees will see an ever-larger percentage of their benefits taxed over time and should make sure to plan accordingly in their budgets.
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