Every October, millions of Americans anxiously wait to find out how much their Social Security benefits will be in the next year. They usually (although not always) receive a raise that helps offset the higher costs they incur.
In 2023, Social Security recipients received an especially hefty cost-of-living adjustment (COLA) of 8.7%. This adjustment translated to hundreds of dollars in additional benefits paid last year. However, that wasn't the end of the story. Many Social Security recipients are now getting hit by an unwanted side effect from last year's big benefit increase.
Image source: Getty Images.
A COLA hangover
There aren't many negatives associated with making more money. But there's at least one downside: paying more taxes. This can especially be troubling for individuals who make estimated tax payments during the year and don't factor in the impact of their increased income.
Some Social Security recipients are finding themselves in this category in 2024. The 8.7% COLA received in 2023 will boost all beneficiaries' income. And it will bump some individuals into a bracket where they will have to pay taxes on their Social Security benefits for the first time.
This isn't a new trend. A recent survey conducted by The Senior Citizens League (TSCL) found that 23% of respondents who had collected Social Security benefits for at least three years paid taxes on their benefits for the first time in 2023.
TSCL Social Security and Medicare policy analyst Mary Johnson noted, though, that it could be an even bigger issue this year. Johnson said, "We expect the higher Social Security income will not only cause more Social Security recipients to pay taxes on their benefits this tax season, but taxes are taking a bigger portion of Social Security checks in 2024."
Will you be affected?
Around 40% of Social Security recipients have to pay federal income taxes on their benefits, according to the Social Security Administration (SSA). Will you be one of them for the 2023 tax year? The following table summarizes who has to pay federal income taxes on their Social Security benefits.
| Federal Tax Return Filing Type | Combined Income | Pay Federal Taxes on Social Security Benefits? |
|---|---|---|
| Individual | <$25,000 | No |
| $25,000 to $34,000 | Yes, up to 50% of benefits | |
| >$34,000 | Yes, up to 85% of benefits | |
| Joint | <$32,000 | No |
| $32,000 to $44,000 | Yes, up to 50% of benefits | |
| >$44,000 | Yes, up to 85% of benefits | |
| Married, filing a separate return | Any | Probably yes |
Data source: Social Security Administration.
It's relatively easy to calculate your combined income. First, get your adjusted gross income. Next, add any nontaxable interest that you received during the year. Finally, add half of your Social Security benefits. The total of these three figures will be your combined income.
You could also have to pay additional state taxes on your Social Security benefits as a result of the 2023 COLA. Only 10 U.S. states still tax Social Security benefits, though. They are:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live in one of these states, you'll need to examine your state's tax regulations to determine if you'll have to pay any state income taxes on your Social Security benefits.
Underscoring a key issue
The prospects of a significant number of Americans having to pay taxes on their Social Security benefits for the first time in 2024 underscores a key issue. Since Social Security benefits became taxable at the federal level in 1984, the taxable income thresholds haven't been adjusted for inflation at all. Of course, Social Security benefits have risen quite a bit during this period thanks to the annual COLAs.
The TSCL recently pointed out two problems resulting from this issue. First, more retirees must pay taxes on their Social Security benefits over time. Second, the percentage of taxable benefits is likely to grow as retirees' income increases.
A lower COLA such as the 3.2% increase received in 2024 doesn't compound these issues as much as a bigger COLA would. However, the fundamental problem won't go away until income thresholds are indexed for inflation.
