Breaking
October 13, 2024

Many Seniors Face Tax Bills on Their 2023 Social Security Benefits

AiBot
Written by AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

Jan 16, 2024

A large number of senior citizens across the country are likely to owe taxes on their 2023 Social Security benefits when they file their tax returns this year. This comes as Social Security recipients are set to receive the biggest cost-of-living increase in decades to keep up with high inflation, but the larger benefit checks mean more seniors could be pushed over the income thresholds that trigger federal taxes on benefits.

Bigger Social Security Checks Lead to Higher Taxes

The 8.7% cost-of-living adjustment (COLA) that went into effect for 2023 Social Security payments is the largest increase since 1981. For the average retiree, this translates to about $140 more per month or $1,680 for the full year. However, bigger monthly checks inevitably push more people over the key income thresholds that determine if and how much of their benefits will be subject to federal income taxes.

2023 Federal Income Tax Thresholds for Social Security Benefits

Filing Status Combined Income* Threshold Percentage of Benefits Taxed
Individual Filers $25,000 to $34,000 Up to 50%
More than $34,000 Up to 85%
Joint Filers $32,000 to $44,000 Up to 50%
More than $44,000 Up to 85%

*Combined income = Adjusted gross income + Nontaxable interest + Half of Social Security benefits

For those already near these thresholds, the latest COLA could be just enough to tip them over the limit. An individual with $24,000 in adjusted gross income plus half their Social Security benefits could see over half of their increased benefits taxed. For joint filers receiving the average $2,800 monthly in combined benefits, about $1,400 gets added to their adjusted gross income in calculating if they owe taxes on benefits. So those previously under the $44,000 threshold may now exceed it.

12 States Also Tax a Portion of Benefits

In addition to possible federal taxes, there are 12 states that currently tax Social Security income to some degree: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, and Vermont. The exemptions and tax rates vary widely across these states. For example, Kansas taxes benefits but only for income over $75,000, while Connecticut applies its normal income tax rates to a sliding scale percentage of benefits depending on total income.

So Social Security recipients in these states could face state taxes on their benefits even if their income remains under the federal thresholds. Retirees should be aware of their specific state’s laws regarding Social Security taxes to determine if the 2023 COLA hike could trigger additional state tax bills.

Strategies to Reduce Taxable Benefits

For seniors that find themselves pushed into owing taxes on a portion of their Social Security income, there may be strategies to help reduce taxable benefits:

Contribute to tax-advantaged retirement accounts – Putting money into Traditional IRAs, 401(k)s or Health Savings Accounts (HSAs) can lower your adjusted gross income used in calculating the taxes on Social Security benefits. Making charitable donations using IRA qualified charitable distributions (QCDs) is another way to potentially lower your AGI without itemizing.

Defer income – If possible considering your sources of income, postponing taxable withdrawals from retirement accounts until you are past full retirement age may help keep taxable income within the thresholds in years prior. Investment income can also potentially be deferred in some cases.

Consider relocation – For some retirees, moving to one of the 38 states that do not tax Social Security benefits could be an option to eliminate state taxes in retirement. Though other taxes and costs of living should factor into any relocation decision.

Review withholdings – Having too much or too little withheld from benefit checks throughout the year can result in getting hit with a large balance due or missing out on money you may have needed. Use the IRS tax estimator to help set proper withholding levels.

Though no one likes to pay more taxes, it’s important to accurately report any taxable portion of Social Security benefits to avoid interest and penalties. Consulting with a tax professional can help navigate regulations in your specific situation.

Future Attempts to Tax Benefits Spark Debate

The large cost-of-living increase for 2023 has renewed debate around proposals to means-test or further tax Social Security benefits in the future as a way to shore up the program’s finances. Supporters argue that serial tax reform has favored higher-income groups in recent decades, so their retirement income could handle more taxation to support the program long-term.

Opponents counter that seniors rely heavily on their promised benefits after paying into the system throughout their careers, so benefits should not face further taxation burdens. They also raise concerns over shoring up financing in ways that could reduce political support for the program.

As legislators grapple with Social Security’s projected funding shortfalls in the coming years and decades, seniors may see more of their retirement income subject to federal or state taxation. For now, recipients are focused on navigating their 2023 tax bills while trying to cope with rising prices and make their bigger benefit checks go farther. Careful planning around income levels and potential relocation will be crucial for retirees looking to minimize taxes on their hard-earned Social Security benefits.

AiBot

AiBot

Author

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

Related Post