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These Seniors May Have to Give Some of Their 8.7% Social Security Raise Back to the Government

Seniors' Social Security checks got a much-needed boost this month as the highly anticipated 8.7% cost-of-living adjustment (COLA) finally went into effect. This places the average benefit at $1,827 per month, or nearly $22,000 per year. But some seniors won't get to keep their whole 2023 raise.

There's a little-known Social Security rule that hasn't changed in decades, and it's coming back to bite more and more seniors. Here's what you need to know about it.

Frustrated person looking at laptop.

Image source: Getty Images.

How Social Security is funded

Social Security receives funding from three sources. The bulk of its funding comes from the Social Security payroll taxes that all workers pay. Currently, this is 12.4% of your income, split equally between employee and employer.

The program also has trust funds, and the money here is invested in government-backed securities, where it earns interest. These funds also help pay out benefits to seniors, workers with disabilities, surviving spouses, and their families.

The third source of funding is Social Security benefit taxes. Seniors may owe these, depending on their provisional income. This is defined as your adjusted gross income (AGI), any nontaxable interest you have, and half your annual Social Security benefit.

The thresholds for benefit taxation, outlined in the chart, have remained the same for decades. And as COLAs continue to increase the average monthly benefit, more seniors are required to pay these taxes. Many will probably run into this for the first time in 2023.

How Social Security benefit taxes work

This table shows how much of your Social Security taxes you could owe based on your tax-filing status and provisional income:

Percentage of Your Social Security Benefit Subject to Tax

Single Filers

Married Couples Filing Jointly

0%

Provisional incomes under $25,000

Provisional incomes under $32,000

Up to 50%

Provisional incomes between $25,000 and $34,000

Provisional incomes between $32,000 and $44,000

Up to 85%

Provisional incomes greater than $34,000

Provisional incomes greater than $44,000

Data source: Social Security Administration.

To be clear, this doesn't mean you'll have to forfeit up to 50% or 85% of your benefit. This only tells you the percentage of your benefit that could be subject to income tax. Your income tax bracket depends on how much you earn from a job or tax-deferred retirement account withdrawals during the year. The highest possible tax bracket is 37%, and most people pay far less than this.

How to avoid Social Security benefit taxes

It's sometimes possible to avoid or reduce your Social Security benefit taxes by being strategic with your retirement withdrawals. Withdrawing less from your retirement accounts each year can reduce your provisional income and thus, how much of your Social Security benefit is subject to tax.

You can also rely more upon Roth retirement savings if you have them. Withdrawals from these accounts are usually tax free because you pay taxes on your contributions when you make them. Because of this, you can take as much money as you want from these accounts and you won't raise your provisional income at all.

But sometimes, it's not possible to avoid these taxes. In that case, there's not much you can do other than to budget accordingly. You can either set aside some money for taxes if you believe you'll wind up with a bill at the end of the year. Or you can request that the Social Security Administration withhold some money from each of your checks for taxes so you won't get a surprise at the end of the year.

Even if you don't owe Social Security benefit taxes this year, it's important to be aware of the possibility. Social Security COLAs continue to raise the average benefit each year, and the government hasn't shown any sign of changing the taxation thresholds listed above, so you may end up owing them in future years.

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