You've probably heard that inflation is surging. And even if you haven't seen the scary headlines, you've assuredly noticed the costs of groceries, gas, heating, and many other household necessities have gone up.
If you're retired, this inflation can hit you hard, since chances are good you're living on a fixed income. While Social Security benefits were increased by 5.9% this year, that big cost-of-living adjustment (COLA) may not be enough by itself to maintain your standard of living amid rising prices. As a result, you may be forced to increase the amount you withdraw from savings.
If you increase your income in 2022 to help you maintain buying power during this time of high inflation, there's one risk to be aware of that could affect the amount of Social Security income that you bring home.
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How a higher household income could affect Social Security benefits
When your household income goes up, bringing in this extra money could have financial consequences when it comes to your Social Security checks. There's a simple reason for that: Once your income creeps up enough, you risk facing more taxes on Social Security benefits.
Benefits aren't taxed at all with income up to a specific threshold, but up to 85% of your benefits could become subject to federal taxation once your income reaches a certain level. There are also 13 states that tax Social Security benefits but usually make an exception for lower earners.
If you take more money out of your accounts in 2022 because prices have gone up on the goods and services you're buying, there's a greater chance your income will fall above the limit where part of your benefits becomes taxable. And if you were already paying tax on some benefits, a higher household income could mean being taxed on more of them.
How high can your income go without owing Social Security taxes?
The big question to ask yourself when your household income goes up is, exactly when do your Social Security benefits become subject to taxation?
When you're talking about federal taxes, only some income counts. The Social Security Administration looks at "provisional" income, which is half your Social Security checks, all taxable income, and some nontaxable income. If your provisional income exceeds certain limits, here are the tax rules you face:
- Single tax filers with a provisional income between $25,000 and $34,000 will owe taxes on up to 50% of benefits.
- Single tax filers with a provisional income above $34,000 will owe taxes on up to 85% of benefits.
- Married joint filers with an income between $32,000 and $44,000 will owe taxes on up to 50% of benefits.
- Married joint filers with an income above $44,000 will owe taxes on up to 85% of benefits.
The thresholds at which benefits become partly taxed aren't subject to adjustment each year as a result of wage growth and inflation. That means while you may need to increase income to maintain buying power this year, the IRS won't take that into account when deciding whether your benefits will be taxed.
Make sure you understand both these federal rules, as well as the rules within your own state, so you can prepare for what new taxes you may owe if you've been forced to increase household income this year.
