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Johnson urges all Social Security recipients to log into their My Social Security accounts, then discuss their income tax withholding with a knowledgeable financial advisor. With a large Social Security COLA on the way, it’s time to explore what you’re likely to owe in taxes, says Mary Johnson, Social Security policy analyst for the Senior Citizens League. “If you earn an extra dollar or receive an extra dollar or two of Social Security, your Medicare premiums can go up by $800, $900 or $1,000 ,” Kotlikoff says. While the income-related monthly adjustment amount that’s used to determine Part B and Part D premiums is adjusted for inflation, a couple filing jointly and making just a few dollars over one of Medicare’s income thresholds can face huge premium increases. How the Social Security COLA Affects Medicare CostsĪ 10.5% Social Security COLA for 2023 would result in some higher-income earners paying more for Medicare Part B (medical insurance) and Part D (prescription drug) benefits. Recipients also may pay increased state taxes in the states that tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia.
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“This is a big concern because a few more years of high inflation and everybody is going to be paying taxes on 85% of their benefits,” says Larry Kotlikoff, a professor of economics at Boston University and the author of “Get What’s Yours,” a book about navigating Social Security. A 10.5% COLA would push that percentage even higher. Most Beneficiaries Now Pay Taxes on Social SecurityĪt one time, Social Security taxes were seen as a tax on the wealthy, but the Social Security Administration estimates most of today’s beneficiaries-56%-pay taxes on their Social Security. In effect, your taxable income would increase by that amount, and you could find yourself pushed into a higher tax bracket. With an income over $34,000, you would be required to pay taxes on 85% of your annual Social Security benefits of $19,884, or $16,901 worth of your benefits. You’d have a total income for the year of $34,284. So, let’s say you receive 2022’s average monthly Social Security benefit of $1,657 and get another $1,200 per month from your IRA, stocks or even a part-time job. Income of more than $44,000: Up to 85% taxed.Income of more than $34,000: Up to 85% taxed.Here’s are closer look at how Social Security benefits are taxed: Under current law, you can owe tax on up to 85% of your benefits if you’re a single taxpayer with annual income over $25,000 or if you and your spouse file jointly and have combined income over $32,000. In 1983, Congress first levied federal income taxes on Social Security benefits. The same government that pays out Social Security also taxes Social Security. Though the increases appear to be good news for older people hard hit by inflation, the numbers don’t factor in what Uncle Sam will take back. The maximum benefit for a person claiming Social Security at what the program calls “full retirement age” (generally 66 or 67) would increase from $3,345 per month to $3,696, for an additional $351 per month or $4,212 per year.The average monthly benefit for a couple who both receive benefits would rise by $289 a month, from $2,753 to $3,042-for an additional $3,468 a year.The estimated average monthly Social Security benefit would increase from $1,657 to $1,831-up $174 per month, or $2,088 for the year.The Senior Citizens League says if prices continue to rise, next year’s Social Security raise could be as high as 11.4% If inflation slows, seniors could see a COLA of about 9.8%-still a big leap.īut if 10.5% is indeed the right number, here’s how benefits would change in 2023: The final increase for 2023 won’t be announced until October, but even if inflation cools, it’s likely the COLA will still be the biggest in years. The annual Social Security adjustment reflects inflation because it’s based on government data on consumer prices.
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The nonpartisan and nonprofit Senior Citizens League is forecasting a 10.5% boost in benefits, which may sound like a boon for Social Security recipients.īut a supersized COLA, or cost-of-living adjustment, could lead to unwanted consequences, including higher taxes and Medicare costs. This year’s sky-high inflation has prompted predictions of a giant Social Security raise for retirees in 2023.