Taxing Your Benefits: Another Inflation Driver for Seniors - AMAC Foundation. Politico
It often comes as a nasty surprise for those new to Social Security…the fact that the monthly benefit they earned through a lifetime of work and paying FICA taxes is now subject to another level of tax: Federal Income Tax. In fact, depending on income levels and filing status, up to 85% of one’s earned Social Security benefit will be added to taxable income at annual filing time, and therefore taxed at the one’s applicable tax rate.
What makes this taxation issue even more onerous now is the inflation spiral we’re seeing here in the U.S. Oddly, the taxation/inflation conundrum can be viewed as a “good news, bad news” situation for seniors, since some early-year projections are that the annual cost-of-living adjustment for 2023 could be as high as 8% (of course, whether COLAs are “raises” or simply “catch up” adjustments is another argument). That could be viewed as the “good news,” until the effect on taxable income levels is considered. The additional taxable income resulting from a substantial COLA, unfortunately, pushes more seniors toward the point at which they see their monthly benefit contributing to their federal tax liability.
The real problem here is that the thresholds for federal taxation of Social Security benefits were set four decades ago, and were then expected to impact less than 10% of filers. These thresholds were not indexed to account for inflation and now snare well over 50% of all filers, and as a result turn the benefit of a large COLA into an increase in federal income tax liability–in other words, a double whammy for seniors as they reach the threshold limits for federal income tax. As Politico senior tax reporter Brian Faler notes in a post on their website, “… government forecasters say surging inflation is pushing more people over those limits.” Read Faler’s post here…