Social Security: How Will the Biggest COLA Increase in Decades Impact Your Taxes?
A big announcement is reportedly coming from the Social Security Administration on Oct. 13, releasing the long-awaited information on the upcoming cost-of-living adjustment (COLA) for 2023 that will increase the amount of benefits paid out to Social Security recipients beginning in January.
See: What Is the Average Social Security Benefit at 65?
Explore: 7 Surprisingly Easy Ways To Reach Your Retirement Goals
According to The Hill, citing data from The Senior Citizens League, projections indicate the increase will be around 8.7%, or roughly an extra $144 monthly, which will impact an estimated 70 million Americans who count on this supplementary income whether they are retired, have lost a spouse or are receiving disability benefits.
Since 1975, the SSA has looked at COLA options every year to adjust for rising costs of living, as noted by The Hill. And this latest increase is on track to be one of the largest boosts ever for the program as inflation in America reaches record levels.
However, there is one way in which the extra financial benefit may negatively affect Americans receiving Social Security benefits. More money can mean more taxes owed.
There are certain thresholds in place, any amount over which will be considered taxable income. Currently those amounts are $25,000 for single filers and $32,000 for joint filers, per The Hill. But with the extra $144 a month that’s expected to be added to payments, or $1,728 per year, that could inch some recipients above that baseline.
Related: IRS Could Change Your Tax Bracket To Fight Inflation
As the New York Times reported, the 87-year-old Social Security program first started being taxed in 1984 as a way to help “stabilize” the resources available. And though the amount paid to beneficiaries is variable every year with COLAs, the tax thresholds have remain fixed over time.
The way the IRS computes the “combined income” statutes for Social Security beneficiaries is by taking a person’s adjusted gross income added to interest from investments and 50% of Social Security payouts, per the New York Times. If below the $25,000 for single filers and $32,000 for joint filers listed above, no income taxes will be applied.
However, anyone falling into the next bracket ($25,000-$34,000 for single people and $32,000-$44,000 for couples) will incur taxes on up to 50% of their benefit amount. And anyone above those figures can pay taxes on up to 85% of their Social Security amount.
Learn: 10 Reasons You Should Claim Social Security Early
Social Security: Must-Know Facts for October 2022
This is where the latest COLA increase really comes into play — and though millions will receive extra money in their monthly payments, many will have to start paying taxes, too.
More From GOBankingRates
- Dollar Tree: 5 High-Quality Items To Buy Now
- Do You Have a Tax Question? Ask a Tax Pro
- The 10 Best Cash Back Credit Cards for 2023
- 6 Reasons Why You Shouldn't Procrastinate on Your Taxes
