It’s no secret the Social Security program is in need of reform. The combined Social Security trust funds — the source of benefits paid to retirees, survivors, and disabled individuals — are on track to be depleted by 2035, according to the Board of Trustees. To make matter worse, benefits have actually lost 40% of their buying power since 2000, according to The Senior Citizen League (TSCL). But beneficiaries are also battling another problem: taxes.
The number of beneficiaries who owe taxes on their Social Security checks has risen rapidly over the last few decades, and with a potentially massive cost-of-living adjustment (COLA) coming in 2023, some seniors will see a larger tax bill in 2024.
Here’s what you should know.
Social Security COLAs offset the impact of inflation
Social Security COLAs are intended to protect the buying power of benefits from inflation. Last year, fallout from the pandemic — loose monetary policy, federal stimulus checks, and supply chain disruptions — sent inflation soaring. That led to a 5.9% COLA in 2022, the largest adjustment since 1981. But inflation has continued to gain momentum this year, meaning the 65 million Americans on Social Security are on pace to see an even bigger COLA next year.
The exact COLA will not be announced until Oct. 13 when the Bureau of Labor Statistics releases inflation data for September. But TSCL expects benefits to rise 8.7% in 2023. That would be the largest COLA in the last 40 years. On the bright side, that extra cash should help offset the rising cost of gas, food, and medical care for seniors. But it will also put more seniors in the crosshairs of the IRS.
More beneficiaries will owe taxes on Social Security income
In 1984, the federal government began taxing Social Security benefits following bipartisan approval of legislation in Congress. Initially, beneficiaries who met the income threshold had to pay taxes on 50% of their Social Security benefit, but a second threshold was added in 1993, beyond which 85% of benefits were subject to taxation. Oddly, neither threshold has ever been adjusted for inflation, and that has created a problem.
In 1984, less than 10% of beneficiaries actually owed taxes on their benefits, but each COLA since that time has pushed more seniors over the income threshold. As a result, 47% of beneficiaries owed taxes on Social Security income in 2010, and that figure is expected to reach 58% by 2030, according to the Social Security Administration (SSA). Unfortunately, a massive COLA in 2023 will only reinforce that trend. That means some beneficiaries will have to pay taxes on benefits for the first time in 2024, and those who already pay taxes on benefits could see an even bigger tax bill.
Will you owe taxes? That depends on your combined income, which is your modified adjusted gross income plus half of your Social Security benefit. The chart below illustrates the different income tax thresholds based on filing status.
Tax Return Filing Status
Taxable Portion of Benefits
$25,000 to $34,000
up to 50%
$34,001 or more
up to 85%
$32,000 to $44,000
up to 50%
$44,001 or more
up to 85%
Beneficiaries who have to pay taxes on benefits have two options. They can make quarterly estimated tax payments to the IRS, or they can request that federal taxes be withheld from their monthly Social Security payments using a Form W-4V.
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