Higher inflation is expected to raise the 2023 Social Security Cost of Living Adjustment, or COLA, by a rate not seen in 40 years, which can read as good news for retirees struggling with price hikes.
Bad news? This generous rise could also push Social Security recipients into higher tax brackets, causing about half of all families to pay taxes on their benefits.
The Social Security Administration will announce the actual 2023 COLA in October. But the expected adjustment will raise the average Social Security retirement benefit of $1,656 by $144.10, according to the Senior Citizens Association, a group that represents seniors.
“Taxes are onerous,” said Mary Johnson, a Social Security and Medicare policy analyst at the Senior Citizens League. “It really is a vital income that gets thrown away. It can be a burden with serious implications for how people access what they need – their housing and food resources, affecting their health.”
If you file an individual tax return and your income is between $25,000 and $34,000, you may have to pay income tax of up to 50% of your benefits. The percentage goes up to 85% if your income is more than $34,000.
Read: This Social Security tax is a scandal hiding in plain sight
For spouses who jointly apply for between $32,000 and $44,000, you may have to pay income tax of up to 50% of your benefits. It jumps to 85% if your combined income is more than $44,000.
These are the same income standards as they were in 1984 when the tax on Social Security benefits first appeared.
These criteria have not been adjusted to account for inflation, Johnson said, meaning about half of beneficiaries will now pay tax on their benefits. That’s up from about 10% in 1984, according to the Social Security Administration.
If income thresholds were adjusted for inflation, today’s $25,000/combined level would be around $72,662 and $32,000/combined would be around $93,008, Johnson said, based on the inflation calculator maintained by the Bureau of Labor Statistics.
“The point is, it’s not fair anymore. It doesn’t work out well for older taxpayers,” Johnson said. “People may not be thinking about the future yet for tax filing purposes, but they need to.”
COLA also affects cost-sharing on Medicare Part B premiums, even though the income threshold is higher than $91,000 for individuals and $182,000 for couples.
Andrew Biggs, a senior fellow at the American Enterprise Institute, has argued that the income threshold for taxing Social Security benefits has been deliberately left so that more people pay tax on half of their eventual benefits.
“Some people will get angry about it. But the income limits – the reason they are not indexed – is that people will be phased out over time. The intent was that over the years, people would pay income taxes on half of their benefits. That’s because they didn’t pay taxes on the part. employer contribution,” Biggs said.
Bigs said an increase in COLA would not result in higher taxes for low-income earners.
“People who need more inflation (COLA) — the bottom half of the population — are getting a lot of inflation protection,” Biggs said.
High-income retirees are protected. “It’s the middle-income people who get the most difficult,” Biggs said.
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