2023 brings a record-high Social Security payment boost. But there's a catch for retirees: higher taxes. Inflation's sting continues.
Social Security's cost-of-living adjustment (COLA) is tied to inflation. Yet, tax exemptions for benefits haven't changed since 1984. For single retirees earning over $25,000, or couples over $32,000, taxes kick in. Earning above $34,000 (individuals) or $44,000 (couples)? Up to 85% of benefits get taxed.
Here's the twist. The 8.7% COLA increase, a peak since 1981, adds about $140 monthly. But it might bump seniors into higher tax brackets. Shannon Benton from the Senior Citizens League warns: "A huge bump in taxes on social security benefits is expected, sadly."
Over 66 million Americans got these bigger payments. Some seniors, never taxed before, will face a change when filing tax returns.
Already, the trend is clear. In 2023, 23% of retirees reported paying taxes on Social Security for the first time. Blame the record-high COLA.
"It's a Catch-22," says Benton. Higher payments are needed, but more gets taxed. The tax thresholds? Unchanged.
Worried about taxes on your Social Security? Check with this IRS calculator.
Next year might bring similar woes. A 3.2% increase is coming, raising average benefits by $59 monthly. Less than last year's hike, but still above pre-pandemic averages.
But bigger COLA increases have other drawbacks. They can reduce eligibility for low-income programs like SNAP.
The Senior Citizens League urges Congress for a change. They propose indexing adjustments to the CPI-E, tracking spending specifically for those 62 and older. A move to reflect the real expenses of seniors.
