How a Social Security Increase Could Raise Your Tax Bill

Tax time is here, so listen up retirees: Your Social Security benefits might be taxable.

But what exactly does that mean?

First: You don’t have to worry about this if Social Security is your only source of income.

But if you earn income from other sources, like a part-time job, a portion of your Social Security benefits may be taxable.

Here’s what you need to know.

How Are Social Security Benefits Taxed?

Not everyone is taxed on their Social Security benefits.

The amount of tax you may owe depends on other income you receive this year.

To figure out if you owe taxes, the Social Security Administration considers what’s known as your “combined income.”

Here’s how it works.

When You Do Pay Taxes on Social Security

Retirees must pay taxes on their Social Security benefits if:

• Half of their yearly Social Security benefits + other income = more than $25,000 for single filers or $32,000 for married couples filing jointly.

The IRS won’t tax your entire Social Security income, even if you exceed those thresholds. Instead:

50% of your Social Security benefits are taxable if:

• Half of your benefits + other income = $25,000 to $34,000 for individuals or $32,000 to $44,000 for married couples filing jointly.

85% of your Social Security benefits are taxable if:

• Half of your benefits + other income = $34,000 and up for individuals or $44,000 and up for married couples filing jointly

Only about 40% of people who receive Social Security have to pay federal income taxes on their benefits, according to the Social Security Administration.

When You Do Not Pay Taxes on Social Security

If Social Security is your only source of retirement income, your benefits very likely won’t be taxed.

That’s because the average monthly benefit amount is $1,742, or $20,904 a year in December 2022, according to the Social Security Administration.

That’s well below the $25,000 limit for single filers.

And remember, Social Security only includes half your benefits when determining your combined income.

Why Some Retirees Might Pay More Taxes in 2023 and 2024

Still, taxes may be on the rise for other retirees, particularly those who earn income from work, self-employment, interest, dividends or other taxable income (like traditional 401(k) and IRA withdrawals).

That’s thanks to a 5.9% Social Security annual cost-of-living adjustment (COLA) in 2022, which boosted the average payment by $92 per month.

An even bigger 8.7% COLA went into effect in January 2023.

These two increases could push retirees who once eked by without owing taxes above the threshold of $25,000 for single filers or $32,000 for married couples filing jointly.

“Unlike income brackets, those thresholds have never been adjusted for inflation,” said Mary Johnson, an analyst with The Senior Citizen League. “More Social Security recipients pay the tax on a portion of their benefits as incomes increase over time.”

What a 5.9% Cost-of-Living Adjustment Could Mean for Your Taxes

Curious how a 5.9% Social Security COLA could impact your taxes this year?

Here’s an example.

Let’s imagine Bob receives $1,700 a month in 2021 from Social Security or $20,400 a year.

Bob also earned $10,000 from a part-time job and withdrew $4,500 from his traditional 401(k).

 In this example:

• Half of Bob’s Social Security benefits = $10,200
• His other income = $14,500
• Bob’s combined income is $24,700 in 2021, which means his Social Security benefits aren’t taxable when he filed taxes in 2022.

However after a 5.9% COLA went into effect in January 2022…

In 2022, Bob’s Social Security payment increases by $100.30 per month, raising his yearly Social Security benefit by $1,203.60 to $21,603.60.

Bob earns the same amount from a part-time job in 2022 ($10,000) and withdraws the same amount from his traditional 401(k) ($4,500).

 In this example:

• Half of Bob’s Social Security benefits = $10,801.80
• His other income = $14,500
• Bob’s combined income is $25,301.80 in 2022, which means 50% of his Social Security benefits are taxable in 2023 when he files taxes.

Things to Keep in Mind About Social Security, Inflation and Taxes

Social Security benefits include monthly retirement, survivor and disability benefits. They do not include Supplemental Security Income (SSI) payments, which are never taxable.

Also, while 50% or 85% of your Social Security benefits may be taxable, they will be taxed at your ordinary income rate.

Here’s a table of the 2022-2023 tax brackets for reference.

The COLA increase could have a bigger impact on married couples, particularly if one person is still working and earning wages.

That’s because even if your spouse didn’t receive any benefits this year, you must add your spouse’s income to yours to figure out whether any of your Social Security benefits are taxable, according to the Internal Revenue Service.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The SS. She focuses on retirement, Medicare, taxes and investing.