Many seniors rely heavily on Social Security to make ends meet. And for some people, those monthly benefits are their only source of predictable income.
If you're in that boat and you have virtually no income outside of Social Security, you may be able to avoid having your benefits taxed at the federal level. But if Social Security is only one of several income sources available to you in retirement (which is a far more optimal situation), you may end up getting taxed on those benefits by the federal government.
In fact, there's a good chance more seniors will pay taxes on their Social Security benefits in 2024 than in years prior. Here's why.
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The thresholds for taxes on benefits are low -- and they haven't changed in decades
To determine whether you'll pay taxes on Social Security, you'll need to calculate your provisional or combined income. That's done by taking 50% of your annual Social Security benefit, all taxable income of yours (like withdrawals from a traditional 401(k) or IRA), and nontaxable interest (like what municipal bonds pay), and totaling all of that up.
If your provisional or combined income amounts to $25,000 or more and you're single, you'll risk paying taxes on your Social Security benefits. The same holds true if you're married and your provisional or combined income is $32,000 or more.
Clearly, these thresholds are pretty low. And as such, it's not so uncommon to be in a position where your Social Security income is taxed.
Further, there's a good chance more seniors will be taxed on Social Security in 2024 than before. That's because the referenced thresholds for combined or provisional income have not changed in decades.
On the other hand, Social Security benefits are eligible for an annual cost-of-living adjustment (COLA) to account for inflation. And this year, benefits are rising by 3.2%. So there could be an uptick in seniors paying taxes on their Social Security benefits by virtue of that raise alone.
Prior to this year's 3.2% COLA, the average monthly Social Security benefit was $1,848. Now, it's $1,907. That's a difference of $59 a month, or $708 a year.
Meanwhile, let's say you're single and prior to 2024, your provisional or combined income was $24,800. In that case, you'd be off the hook as far as federal taxes on Social Security go. But if your annual Social Security income is now $700 higher, half of that gets counted toward provisional or combined income, bringing you right above $25,000, where taxes start to apply.
Are taxes on Social Security avoidable?
If you're already retired, it may be possible to avoid having your Social Security benefits taxed by limiting the extent to which you take withdrawals from a traditional retirement plan in a given year. However, that could mean not having enough money to live on, so it's hardly a wonderful solution.
If you're not yet retired, though, you may want to consider saving for retirement in a Roth account instead of a traditional savings plan. Roth IRA and 401(k) withdrawals aren't taxed, and they're not factored into combined or provisional income. So that could set you up to avoid unwanted taxes down the line.
All told, the more Social Security benefits continue to grow, the more people might be impacted by the archaic rules that determine how those benefits are taxed. It would be a good thing for lawmakers to reconsider the thresholds for imposing those taxes, given that living costs and benefits have risen substantially since they were established.
Also, Social Security is subject to an annual COLA. So why shouldn't the rules related to taxes on benefits get an inflation-related update as well?
