Social Security recipients could get hit with a surprise tax bill this year
Record-high Social Security increase in 2023 could create tax nightmare this year
Larry Kudlow: Lower taxes have always boosted economic growth
FOX Business host Larry Kudlow breaks down tax and economic policy on 'Kudlow.'
The record-high Social Security payment increase in 2023 could bring along an unwelcome side effect for retired Americans still grappling with the sting of inflation: higher taxes.
Although Social Security recipients receive a cost-of-living adjustment (COLA) that is indexed to inflation, the amount of benefits exempted from taxes has remained unchanged for decades. Since 1984, retirees have owed taxes on their benefits if their adjusted gross income — including up to 85% of their Social Security payments — is more than $25,000 if they are single or $32,000 if they are a married couple.
Individuals earning more than $34,000 and couples earning more than $44,000 can be taxed on up to 85% of their benefits.
Now, experts say the ongoing inflation crisis could ultimately push more seniors into higher tax brackets as a result of last year's 8.7% COLA increase — the biggest since 1981. It increased the average monthly benefit by about $140.
SMALL SOCIAL SECURITY COLA COULD LEAVE RETIREES STRUGGLING TO GET BY THIS YEAR
"If [retirees] have been fortunate enough to put even a little bit aside, it’s almost guaranteed. We really expect a huge bump in the number of people who will be paying taxes on their social security benefits this year, sadly," Shannon Benton, executive director of the Senior Citizens League, told FOX Business.
More than 66 million Americans collecting Social Security received the bigger payments last year, the Social Security Administration said.
REMOTE WORKERS FACE A DOUBLE TAXATION THREAT
Some seniors may never have owed taxes on their benefits, but that is likely to change this year when they file their tax returns.
The number of beneficiaries reporting that they paid federal income tax on their Social Security benefits has already been rising, even before the record-high cost-of-living increase took effect. During the 2023 tax season, 23% of retirees who received Social Security for three years or more said they paid tax for the first time, according to a recent study conducted by the Senior Citizens League.
A Social Security card sits alongside checks from the Treasury in Washington, D.C., on Oct. 14, 2021. (Kevin Dietsch/Getty Images / Getty Images)
The trend is expected to continue this year, when retirees have to account for the big payment boost they received last year.
"It’s kind of a Catch-22," Benton said. "It’s like, ‘OK, give me a raise, but then take more of it away.’ So they’re getting this increase every year that they desperately need, but the [tax] thresholds have never been increased."
You can determine whether your Social Security benefits might be taxable this year by using this calculator from the IRS.
NEW IRS TAX BRACKETS TAKE EFFECT IN 2024, MEANING YOUR PAYCHECK COULD BE BIGGER NEXT YEAR
More Americans could be forced to pay taxes on their benefits next year. Seniors are receiving a 3.2% payment increase this year, which will raise the average benefit of $1,907 by about $59 per month. While that is a marked decline from the inflation-fueled increase of last year, it is well above the typical 2.6% average seen before the pandemic began.
A shopper looks at organic produce at a supermarket in Montebello, California, on Aug. 23, 2022. (Frederic J. Brown/AFP via Getty Images / Getty Images)
There are other downsides to big COLA increases.
Higher monthly income can also reduce seniors' eligibility for low-income programs like SNAP, the Supplemental Nutrition Assistance Program (food stamps), Johnson said.
GET FOX BUSINESS ON THE GO BY CLICKING HERE
The Senior Citizens League has pushed Congress to adopt legislation that would index the adjustment to inflation specifically for seniors, such as the Consumer Price Index for the Elderly, or the CPI-E. That index tracks explicitly the spending of households with people aged 62 and older.