Social Security: How Your 2023 Tax Payments Could Be Affected by Program Changes

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Social Security changes that went into effect this year are already having a tax impact for certain Americans, and the impact will extend into next year when it’s time to file 2023 tax returns.

The most immediate impact is related to the income threshold for wages subject to Social Security payroll taxes. In 2023, you have to pay taxes on all wages up to $160,200. That’s up from $147,000 in 2022 and $142,800 in 2021, according to the Social Security Administration.

What it means is that high earners will have more tax money deducted from their earnings this year than they have in the past, with an additional $13,200 in income subject to Social Security taxes in 2023 vs. 2022. This is not unusual — the SSA has hiked the income threshold every year since 2016 and in all but three years since 1972.

Another change in 2023 involves the retirement earnings test for Social Security recipients who continue to work and earn outside income. If you have not reached full retirement age, $1 in benefits will be withheld for every $2 in earnings above $21,240 in 2023, according to the SSA. That’s up from $19,560 in 2022.

The above changes could have an impact on your 2023 tax year returns, depending on how much money you earn. But the biggest impact will be felt by this year’s 8.7% cost-of-living adjustment (COLA), the biggest in more than four decades.

The 2023 COLA pushed the average Social Security payment to $1,827 a month from $1,681 previously. It also pushed some beneficiaries into a higher tax bracket, which could translate into higher taxes when they file their 2023 returns next year.

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As previously reported by GOBankingRates, recipients might owe taxes on a portion of their Social Security benefits when their combined income is greater than $25,000 for single filers or $32,000 for couples filing jointly.

Combined income, also known as provisional income, is the total of half of your Social Security benefits, your tax-exempt interest and other non-Social Security items (such as jobs or investments) that make up your adjusted gross income.

Individuals with combined income above $25,000 and joint filers above $32,000 have up to 50% of their Social Security income taxed. For individuals with combined income above $34,000 and joint filers above $44,000, up to 85% of Social Security is taxed.

Although Social Security benefits are adjusted for inflation each year, the income tax thresholds for recipients have not changed since benefits were first taxed in 1984. This means that whenever benefits are increased, more seniors are exposed to income taxes on Social Security.

Because of high COLAs in recent years — including a 5.9% adjustment in 2022 — more seniors are now subject to the 85% tax.

If the thresholds had been adjusted for inflation, the initial $25,000 threshold would now be around $73,000, according to The Senior Citizens League, a nonpartisan advocacy group. The $32,000 threshold for couples would be $93,200.

“This failure to adjust the income thresholds is negatively viewed by older taxpayers as a form of double taxation and even described as ‘ageist’ in the comments we receive,” Mary Johnson, The Senior Citizens League’s Social Security and Medicare policy analyst, said in a press release earlier this year.

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