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May 22, 2024

Seniors Face Surprise Tax Bills as Social Security Benefits Rise

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Jan 17, 2024

Benefits increased in 2023, but taxes weren’t adjusted

Social Security recipients across the country are facing unexpected tax bills this year due to increased benefits in 2023 that many didn’t plan for.

According to a report by Forbes, Social Security benefits received a historic 8.7% cost-of-living adjustment (COLA) for 2023 in response to high inflation. For the average recipient, this amounted to about $140 more per month in benefits. However, thresholds for taxation of benefits are not indexed to inflation annually like COLA increases. This means millions of seniors who were previously under the taxation threshold are now over it, owing federal and possibly state taxes on their benefits for the first time.

Over 12 million seniors affected nationally

Industry estimates show that over 12 million Social Security beneficiaries nationwide will owe taxes on their 2023 benefits when they file their returns this year. For those already on the cusp of the thresholds, even a moderate COLA increase can push them over.

State                  # of residents owing new taxes on benefits
Pennsylvania                         1.7 million
Florida                              1.6 million  
Texas                                1.3 million
New York                             1.2 million
North Carolina                       1.1 million

(Estimates via AOL News)

This has caught many seniors off guard who depend on Social Security as their primary or only source of income in retirement. The sudden tax obligations range from a few hundred to a few thousand dollars depending on income levels. For those on fixed budgets, this can pose a real financial hardship.

How taxation of Social Security benefits works

Federal guidelines determine what portion, if any, of Social Security retirement benefits are subject to income taxes each year. Whether one owes taxes on their benefits depends on their “combined income” – which includes adjusted gross income, non-taxable interest, and half of their annual Social Security benefits.

For individual tax filers, if combined income is between $25,000 and $34,000, up to 50% of benefits can be taxed. Over $34,000, up to 85% can be taxed. For joint filers, these thresholds are $32,000 to $44,000 and over $44,000. State taxes often mirror portions of the federal policy.

These thresholds have not changed since 1984 and are not adjusted for inflation. Any COLA increase that pushes a senior’s income over the decades-old thresholds means their benefits instantly become taxable at the federal and possibly state level.

Calls to update outdated policy

Advocates for seniors argue the decades-old taxation thresholds urgently need to be updated given current economic realities. Leaving them stagnant for 40 years increasingly and unfairly burdens retirees relying on Social Security.

As Jim Wolfe, policy analyst at the AARP explains:

“Restoring the value of the tax thresholds to match inflation would fix this problem before more seniors get caught unaware. Failing to act would mean perpetuating what amounts to a backdoor benefit cut for millions of older Americans.”

States move to exempt benefits from state taxes

While federal law determines what portion of benefits are federally taxable, states can set their own policies on state taxation of benefits. In 2023, thirteen states fully exempt Social Security benefits from state income tax:

States Fully Exempting Social Security Benefits 
Mississippi
Pennsylvania 
Tennessee
Louisiana
Alabama
Kentucky 
Michigan
New Jersey
Virginia  
Georgia
North Carolina
South Carolina
Hawaii

An additional five states follow federal thresholds for what portion is taxable: Arizona, Kansas, Missouri, Montana, and New Mexico. All other states set their own partial exemption levels. Some states like California offer special tax credits to offset liability.

Bracing for next year

While the 2023 COLA increase triggered tax shocks for many this year, the 2024 COLA adjustment is likely to push even more seniors over the taxation thresholds. The latest COLA is an unusually high 8.7% for 2024 as well. With two historic back-to-back increases, experts predict up to 2 million additional beneficiaries nationwide will owe federal taxes on their benefits when they file their 2024 returns.

For seniors already caught off guard this year, the prospect of another tax hit next year is worrisome. Advocacy groups are urging legislators to institute guards like automatic tax withholding from monthly Social Security payments for those projected to owe over a few hundred dollars. Automatically setting aside a portion would ease the burden when tax time comes rather than facing a sudden four-figure bill.

Planning ahead

For beneficiaries unsure if the recent COLA increases could trigger taxes on their benefits, experts emphasize planning ahead this year.

  • Review official Social Security statements detailing annual benefit amounts
  • Consult with a tax professional to project possible taxation
  • Adjust federal and state tax withholding as needed
  • Set aside money to cover a potential new tax liability

While many seniors are caught unexpectedly this year, taking proactive steps and following the latest proposals around COLAs, taxation thresholds, and state policies can help avoid重复 surprises. Paying close attention to next year’s COLA announcement and making appropriate adjustments early will also allow beneficiaries to respond in a more measured, less stressful way.

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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.

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