Social Security checks are expected to receive a huge boost in 2023, thanks to an above-average adjustment in the cost of living (COLA). This should help recipients’ checks keep up with skyrocketing inflation, but it may come with hidden costs for some seniors. Here’s what you need to know if you want to avoid an unpleasant shock.
You may not keep all of your Social Security benefits
The official Social Security COLA 2023 will be announced in October 2022. It is based on inflation data for the third quarter. Since we’re only about halfway through the third quarter now, we can only speculate.
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Some estimates put the increase as high as 10.8%. That would add an extra $175 a month to the average Social Security check, or about $2,100 a year. But this money may not all be yours to keep.
The federal government taxes certain recipients’ Social Security benefits, and it’s possible some seniors will owe these taxes for the first time next year. It all depends on your provisional or combined income. This is your adjusted gross income (AGI) plus any non-taxable interest — which you might have if you own municipal bonds — and half of your annual Social Security benefit.
The following table shows how much tax you may owe based on your provisional income and tax return status:
Tax return status
0% of the benefits taxed
Taxed up to 50% of the benefits
Taxed up to 85% of the benefits
Single, Head of Family, Qualifying Widow or Married, Submit Separately
Provisional Income Under $25,000
Provisional income between $25,000 and $34,000
Provisional income above $34,000
Married, filing jointly
Provisional Income Under $32,000
Provisional income between $32,000 and $44,000
Provisional income above $44,000
Data source: Social Security Administration.
Before you panic, it’s important to note that falling into the above 50% or 85% brackets doesn’t mean you lose 50% or 85% of your benefits to the government. Let’s look at an example to see how this works in practice.
Let’s say you’re a single adult withdrawing $25,000 from your 401(k) and you get $20,000 a year in Social Security benefits. You do not have tax-free interest. That would bring your preliminary income to $35,000.
You would owe no tax at all on the first $25,000. You would have $9,000 that falls within the 50% tax range – between $25,000 and $34,000. Half, or $4,500, of that would be subject to taxes. Finally, you would owe tax on 85% of the remaining $1,000, which works out to $850. So only $5,350 of your benefits would actually be taxed.
That’s still not the amount you would give to the government. That depends on your tax bracket for the year.
Most people are not going to give away a large portion of their savings to Uncle Sam. However, it’s important to know that you can lose some of your checks back to the government so you don’t have an unpleasant surprise during tax.
It’s also worth noting that 12 states also tax some residents’ Social Security benefits. Each state has its own formula for determining who is owed. If you live in one of them, it’s best to check with your state tax authorities to find out if it will affect you.
How to Avoid Social Security Taxes?
It’s not always possible to avoid Social Security taxes, but it can be an option for some, especially those with a lot of Roth savings. Withdrawals from Roth retirement accounts are tax-free, so they don’t count toward your provisional income. However, the same cannot be said of most 401(k)s and traditional IRAs.
Once the government announces COLA 2023, you can use this data to estimate what your annual Social Security benefit will be next year. This, combined with your estimates of your annual expenses, can help you determine whether you are at risk of paying Social Security taxes.
If so, cutting your spending or relying on Roth savings as you approach the tax thresholds listed above may keep you from paying taxes. But if that’s not possible, you should just be comfortable with the idea of paying taxes on your Social Security benefits.
Try to anticipate how much you may owe and set this money aside for taxes. If you get a bill that you can’t pay right away, talk to the IRS about setting up a payment plan. You may be able to make an arrangement so that you can pay off your debt little by little.
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