There's been a lot of talk lately about the changes 2024 will bring to Social Security and how they will affect seniors' benefits. But it's just as important to look at what's not changing when estimating how far your checks will go next year.
There's one rule in particular that hasn't changed in 30 years, and every year it remains on the books, it costs seniors more. In 2022 alone, it forced Social Security recipients to cough up $47.1 billion, and the odds are good that figure is higher in 2023. Here's what you need to know about it and how you might be able to avoid it.
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A brief overview of how Social Security is funded
The reason seniors are losing a massive amount of their collective Social Security checks each year has to do with a change the government made to the program's funding way back in 1984. Prior to this, the government relied upon two sources to fund Social Security: the payroll taxes that workers pay to this day and interest generated from the payroll tax income after it was invested in government-backed securities.
That worked well for a while, but in the late 1970s and early 1980s, there was growing concern about Social Security's solvency. The government decided to institute a Social Security benefit tax on some seniors to give the program an additional source of revenue.
This enabled it to tax up to 50% of the Social Security benefits of seniors who had provisional incomes -- adjusted gross incomes (AGIs), plus any nontaxable interest and half their annual Social Security benefit -- of $25,000 or more for individuals or $32,000 or more for married couples.
And then in 1994, the government added a second tier of benefit taxation. This enabled it to tax up to 85% of the benefits of seniors with provisional incomes above $34,000 for individuals and $44,000 for married couples.
Those rules remain the same to this day. Unlike other aspects of Social Security, these taxation thresholds aren't indexed for inflation. So as average benefit checks rise over time, more seniors find themselves giving a portion of their Social Security benefit back to the government.
In the last 10 years alone, taxation of Social Security benefits has ballooned from about $20.7 billion in program revenue in 2013 to $47.1 billion in 2022. And with the 8.7% cost-of-living adjustment (COLA) that seniors saw last year, I'd be very surprised if that number didn't rise for 2023.
What seniors can do
Much as everyone would like to keep all their hard-earned Social Security checks, it's important to understand that sometimes this just isn't possible. If your provisional income exceeds the thresholds outlined above, you will have to pay taxes on some of your Social Security benefits.
It might be possible for some people to avoid benefit taxes by reducing their taxable income in other ways. For example, dropping to part-time work to reduce income for a job or relying more upon Roth savings if you have them since these don't count toward your taxable income. But even if you do this, the rising cost of living will likely make it increasingly difficult to avoid these low thresholds for benefit taxation.
So the next-best thing you can do is plan for Social Security benefit taxes. You can pay these at tax time, but it might be easier to request that the Social Security Administration withhold money for taxes from your checks. That way, you know that whatever you receive is yours.
To do this, you must fill out Form W-4 V and mail or fax it to your local Social Security office. If you have any questions about Social Security benefit taxation or how it might affect you, call the Social Security Administration or schedule an appointment at a local office for more information.
