Many Social Security Recipients Will Owe Taxes for the First Time — Here’s What To Expect
Written by
Dawn Allcot
Edited by
Chris Cluff
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Last year, the federal government and Social Security Administration gave Social Security beneficiaries a raise, of sorts. The SSA hiked benefits by 8.7% in 2022 for payments delivered beginning in December 2022 and continuing throughout 2023.
The increase, which was the highest since 1981 when benefits rose by 11.2%, gave people an average of $140 more in their monthly benefits. The extra money helped many people afford fuel, groceries and other necessities as inflation plagued the country.
Be Ready for a Higher Tax Bill in 2024
But, it may have come with a price. Some retirees and other Social Security beneficiaries may pay more than they expect in Federal Income taxes this year. For many retirees, according to a report from Yahoo Finance, it will be the first time ever they have to pay taxes in retirement.
A survey by the Senior Citizens League revealed that roughly 25% of older Americans paid federal income tax on their Social Security benefits in 2022. That number could be much higher for the 2024 tax season, which reflects 2023 income.
The Social Security Administration revealed that roughly 40% of recipients pay federal income tax on their benefits, typically because they also have substantial income from other sources including wages, interest, or dividends from investments.
Mary Johnson, a Social Security and Medicare policy analyst for The Senior Citizens League, told Yahoo Finance, “We expect more beneficiaries to become liable for federal income taxes on their Social Security benefits for the first time in the upcoming 2024 tax season.”
How Federal Income Tax and Social Security Payments Work
You might be surprised how little you can earn before you’re liable for federal taxes on your Social Security benefits. Unlike benefits payments, tax brackets, and the standard deduction, the income threshold for taxing Social Security income hasn’t been adjusted for inflation since 1984. That was the year the government started taxing these benefits.
However, you’ll only pay taxes on a portion of your benefit, keeping your effective tax rate lower than the rate for earned income.
Will You Owe Taxes on Social Security?
If your combined income is between $25,000 and $34,000, as an individual filer, you could have to pay income tax on up to 50% of your benefits. For those with more than $34,000 in income, that number goes up to 85%.
Joint filers will be taxed on up to 40% of their Social Security benefits if their total income is between $32,000 and $44,000. Income exceeding $44,000 will lead to taxes on up to 85% of your benefits.
Of course, you might also be liable for taxes on other sources of income, depending on how you structured your retirement savings.
“A lot of our clients will exceed the $44,000 of combined income for Married Filing Jointly, and it is just something that is understood, and we need to consider when planning for retirement,” Ryan Haiss, a certified financial planner at Flynn Zito Capital Management in Garden City, New York, told Yahoo Finance.
Taxes in Retirement for Older Americans
Retirees aged 73 and over may have another concern at tax time. At age 73, you must start taking required minimum distributions from many tax-deferred retirement accounts, including IRAs. These RMDs, as they are called, could drive up your income beyond the threshold for paying taxes.
You might need to take out even more money from your investment accounts, in that case, to account for your tax bill.
Next Steps for Financial Planning in Retirement
If you’re unsure how last year’s higher Social Security payments, combined with your other income, will affect your 2023 tax bill, it’s important to speak with a tax professional now.
You might also want to discuss any changes to your retirement accounts with a financial planner to help reduce your tax liability for next year, or at least put money aside to cover the bill.
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