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Many retirees’ budgets may take a hit for the first time this tax season due to a federal income tax charge on a portion of their Social Security benefits.
Social Security recipients will receive a higher cost-of-living adjustment (COLA) of 8.7% in 2023, an average increase of $140 per month, the largest increase in more than 40 years. This increase could cause your benefits to exceed the taxable income threshold.
read more: How to find out your Social Security COLA increase in 2024
The hurdles are lower than you think. Couples with a combined income of only $32,000 may be owed taxes.
“For the first time in the upcoming 2024 tax season, more beneficiaries will be liable to pay federal income taxes on their Social Security benefits,” said Mary Johnson, Social Security and Medicare policy analyst at the Alliance on Aging. “We expect it to be,” Mary Johnson, Social Security and Medicare policy analyst at the Federation for Senior Citizens, told Yahoo Finance.
That “may catch them off guard,” she added.
Unexpected tax bills will be an additional setback for seniors trying to make ends meet. High costs continue to cut into retirees’ budgets, even as inflation remains well below its 40-year high of 9.1%, which peaked in June 2022.
Complete coverage: 2024 Taxes — Everything You Need to File Your Taxes on Time
Consumer prices rose more than expected in December. According to the Consumer Price Index (CPI), prices rose slightly by 0.3% from last month and 3.4% from a year ago. Among the items that are increasing are rent, electricity, gasoline, and car insurance.
In a recent National Federation of Senior Citizens survey, more than two-thirds of seniors said their monthly budget for necessities like housing, food and prescription drugs was 10% higher than a year ago.
Medicare costs will go up this year. The standard monthly rate for Part B increased from $164.90 to $174.70. The annual deductible for all Medicare Part B beneficiaries will be $240 in 2024, an increase of $14 starting in 2023.
“This is a huge shock to our clients,” Ryan Heiss, a certified financial planner at Flynn Zito Capital Management in Garden City, New York, told Yahoo Finance. “Many people think their Social Security benefits are going to go up, but they don’t think their Medicare premiums are going up the same way.”
“We do a lot of planning for retirees, and part of that is explaining to our clients that Social Security is taxable for many people,” he said.
Rules regarding social security benefits and taxes
Although most states do not tax Social Security benefits, about 40% of people receiving Social Security must pay federal income taxes on their benefits, according to the Social Security Administration. If you file a federal tax return as an individual and your total income from all sources, including Social Security benefits, is in the range of $25,000 to $34,000, you will receive income tax on up to 50% of your benefits. you may have to pay. If your income exceeds $34,000, up to 85% of your benefits can be taxed.
If you’re a joint filer, you may have to pay income tax on up to 50% of your benefits if you and your spouse have a combined income of $32,000 to $44,000. Up to 85% of your benefits can be taxed if they exceed $44,000.
“Many of our clients will exceed their Married Filing Jointly total income of $44,000, which is understandable and must be taken into account when planning for retirement,” Heiss added. .
Why taxable income is slightly limited
Surprisingly, unlike income tax brackets and the standard deduction, these income thresholds have never been adjusted for inflation since the law taxing Social Security benefits first took effect in 1984.
“The cap doesn’t increase with inflation, so over time, more households will be taxed on benefits,” Anki Chen, assistant director of savings research at Boston University’s Center for Retirement Research, told Yahoo.・Told Finance.
“Keep in mind that even at high income levels, only a portion of your benefits are subject to tax,” she adds, noting that your effective tax rate, or the amount you actually pay, is your Social Security benefit. He pointed out that the tax on gold is much lower than other common taxes. earned income.
Nevertheless, according to Johnson, “If we adjust these thresholds to today’s dollars, the $25,000 threshold would be approximately $75,330 and the $32,000 threshold would be approximately $96,424.”
It’s not just the extra cabbage in your monthly Social Security check that causes a tax bill. This is when combined with other income. Your gross income is made up of your adjusted gross income, tax-free interest, and half of your annual Social Security payments.
If you receive Social Security benefits and you turn 73 and must begin taking required minimum distributions from your IRA or other tax-deferred account, these sources of income can easily add up to your tax limit. may exceed. The amount you need to withdraw as an RMD is calculated by dividing your tax-deferred retirement account balance as of December 31 of the previous year by the life expectancy factor corresponding to your age on the IRS Uniform Life Expectancy Table. As life expectancy decreases, the proportion of assets that must be withdrawn increases.
The 2022 tax year could be a harbinger of what will happen this year as retirees come due on their taxes. The National Federation of Senior Citizens survey asked 4,375 elderly taxpayers whether they had to pay federal income tax on a portion of their Social Security benefits for the first time that year, when the COLA was 5.9%.
Almost a quarter said yes.
“Given the 2023 COLA of 8.7%, it becomes even more likely that the yes number will increase further this year,” Johnson said.
plan ahead
You can run the numbers to figure out whether your Social Security benefits are taxable this year with the IRS calculator.
Looking ahead, Social Security benefits will increase by 3.2% in 2024. The increase increases average monthly benefits by more than $50, increasing benefits from $1,848 to $1,907 starting this month, according to the Social Security Administration. Although this is a much smaller increase than the COLA increase over the past two years, it is still higher than the average increase of 2.6% over the past 10 years.
Another thing to look at when doing your tax planning is your income from savings and investment accounts. This has increased significantly. For example, if you move your savings into a high-yield CD, your taxable income may increase.
“Many retirees are taking advantage of today’s high interest rate environment through CDs and high-yield savings vehicles, which is great,” Heiss said. “but [it’s] It is important to note that the interest earned on these investments is taxed at ordinary income tax rates. ”
Kelly Hannon is a senior columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of her 14 books, including “The World’s Best.”Taking Control Even Over 50: How to Succeed in the New World of Work.” and “You’re never too old to get rich.” Follow her on X @Kellyhannon.
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