Social Security checks are expected to get a massive boost in 2023, thanks to an above-average cost-of-living adjustment (COLA). This is supposed to help recipients' checks keep up with sky-high inflation, but it could carry a hidden cost for some seniors. Here's what you need to know if you want to avoid an unpleasant shock.

You might not get to keep all your Social Security benefits

The official 2023 Social Security COLA will be announced in October 2022. It's based on third-quarter inflation data. Since we're only about halfway through the third quarter right now, all we can do is speculate. 

Stressed person with hand over face.

Image source: Getty Images.

Some estimates put the increase as high as 10.8%. That would add an extra $175 per month to the average Social Security check, or about $2,100 per year. But this money may not all be yours to keep.

The federal government taxes the Social Security benefits of certain recipients, and it's possible that some seniors could find themselves owing these taxes for the first time next year. It all depends on your provisional, or combined, income. This is your adjusted gross income (AGI) plus any nontaxable interest -- which you might have if you own municipal bonds -- and half of your annual Social Security benefit.

The following table shows how much tax you could owe based on your provisional income and tax-filing status:

Tax Filing Status

0% of Benefits Taxed

Up to 50% of Benefits Taxed

Up to 85% of Benefits Taxed

Single, head of household, qualifying widow(er), or married, filing separately

Provisional income under $25,000

Provisional income between $25,000 and $34,000

Provisional income greater than $34,000

Married, filing jointly

Provisional income under $32,000

Provisional income between $32,000 and $44,000

Provisional income greater than $44,000

Data source: Social Security Administration.

Before you panic, it's important to note that falling into the 50% or 85% brackets above doesn't mean you're going to lose 50% or 85% of your benefits back to the government. Let's look at an example to see how this actually works in practice.

Say you're a single adult who withdraws $25,000 from your 401(k) and you get $20,000 a year in Social Security benefits. You don't have any nontaxable interest. That would put your provisional income at $35,000.

You wouldn't owe taxes on the first $25,000 at all. You'd have $9,000 that falls in the 50% taxation range -- between $25,000 and $34,000. Half, or $4,500, of that would be subject to taxes. Finally, you'd owe taxes on 85% of the remaining $1,000, which comes out to $850. So only $5,350 of your benefits would actually be subject to taxes.

That's still not the amount you'd actually give to the government. That depends on your income-tax bracket for the year. 

Most people aren't going to give away a huge chunk of their savings to Uncle Sam. However, it's important to be aware that you could lose some of your checks back to the government so you don't run into a nasty surprise at tax time.

It's also worth noting that 12 states tax Social Security benefits of some residents, as well. Each state has its own formula for determining who owes. If you live in one of them, it's best to check with your state's department of taxation to find out if this will affect you.

How to avoid Social Security benefit taxes

Avoiding Social Security benefit taxes isn't always possible, but it might be an option for some, especially those with a lot of Roth savings. Withdrawals from Roth retirement accounts are tax-free, so they don't count toward your provisional income. The same can't be said of most 401(k)s and traditional IRAs, though.

Once the government announces the 2023 COLA, you can use this data to estimate what your annual Social Security benefit will be next year. This, coupled with your estimates of your annual spending, can help you determine whether you're at risk of owing Social Security benefit taxes.

If this is the case, reducing your spending or relying upon Roth savings as you near the taxation thresholds mentioned above could keep you from owing taxes. But when that's not possible, you just have to get comfortable with the idea of paying taxes on your Social Security benefits.

Try to anticipate how much you might owe and set this money aside for taxes. If you end up with a bill you can't pay right away, talk to the IRS about setting up a payment plan. You may be able to work out an arrangement so you can pay your debt a little at a time.