Social Security COLA: What Are the Tax Implications of the Biggest Payment Bump in Decades?

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The Social Security Administration’s announcement this week that beneficiaries will get an 8.7% cost-of-living adjustment (COLA) in 2023 should provide welcome financial relief to those struggling to deal with soaring inflation. There is a potential downside, however, having to do with how the COLA will impact tax obligations for seniors.

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On average, Social Security benefits will increase by more than $140 a month in 2023, the SSA said in a Thursday press release. In some cases, the extra money will push seniors into income ranges where Social Security benefits become taxable, said Matthew Frankel, a certified financial planner and contributing analyst at The Motley Fool.

“The income thresholds are not adjusted for inflation over time, so higher Social Security benefits could mean higher tax bills for people who were on the cusp in 2022,” Frankel told GOBankingRates.

The IRS tax code treats Social Security benefits differently from other types of income, according to The Tax Foundation, a nonprofit tax policy organization. One difference is that Social Security taxpayers must calculate their “combined income,” which is defined as their adjusted gross income (AGI), tax-exempt interest income, and half of their Social Security benefits.

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Those who earn a combined income of less than $25,000 a year for single filers or $32,000 for joint filers pay no tax on their Social Security benefits. Taxpayers earning between those thresholds and up to $34,000 for single filers or $44,000 for joint filers pay tax on up to 50% of their benefits. Above those levels, up to 85% of Social Security benefits are taxed.

Because of the high COLA in 2023, many Social Security beneficiaries who don’t pay income taxes now might be pushed into income levels where they are taxed. Others might face higher tax rates. This is mainly because although Social Security payments are adjusted for inflation, taxable income levels are not.

Another potential problem is that any increase in income could potentially impact what an individual pays in Medicare premiums if that income goes over certain thresholds, said Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League. This could have an effect on both low- and high-income seniors.

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“Those who receive low-income assistance for healthcare costs can be subject to trims in the amount of assistance they receive through Medicare Savings programs, Medicare Extra Help, or Medicaid,” Johnson told GOBankingRates. “Increased incomes due to the COLA can make older and disabled beneficiaries ineligible for the level of benefits they currently receive when their income exceeds the limits.”

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Meanwhile, higher-income Medicare beneficiaries might have to pay more for Part B and Part D premiums if the 2023 COLA pushes their incomes above $97,000 a year for individuals or $194,00 for joint taxpayers, she added.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who previously held staff positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal and Business North Carolina magazine. He holds a B.A. in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting earned awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A native of North Carolina who also writes fiction, Vance’s short story, “Saint Christopher,” placed second in the 2019 Writer’s Digest Short Short Story Competition. Two of his short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. His debut novel, Voodoo Hideaway, was published in 2021 by Atmosphere Press.
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