The Social Security Administration is expected to announce the 2023 COLA as of October 13. The increase could be substantial for United States citizens. Great news for those who see their monthly income falling short in the face of rising prices. Bad news for those above the income thresholds where a portion of their benefits are taxable.
Social Security benefits were not taxable before 1984. However, to maintain the solvency of the Trust Fund that maintains the program, bipartisan legislation was passed that taxed a portion of the payments to retired United States citizens, surviving spouses, and the disabled if they had incomes above the minimum threshold.
It used to be that fewer than 1 in 10 Social Security beneficiaries had to pay income tax on their benefits. But that percentage has increased over time. Unlike benefits, the thresholds were not indexed to inflation and no inflation adjustments have been made in the intervening four decades. This means that as benefits increased, more beneficiaries exceeded the thresholds. Now, 56% of beneficiaries pay income tax on a portion of their benefits, sometimes up to 85% if their total income exceeds the higher thresholds.
There is no age at which you are no longer taxed on Social Security benefits. However, once you have reached retirement age, which ranges from age 65 to 67, depending on your year of birth, your SSA payments can no longer be withheld if, when combined with your other forms of income, they exceed the maximum threshold.
The amount of your annual Social Security entitlement continues to grow until you reach age 70, so you may want to consider delaying your application for a few years if you intend to continue working beyond normal retirement age.
How are Social Security payments taxed?
Taxation of Social Security benefits varies depending on a number of factors, in addition to age, the family income of the beneficiaries is the main determinant of taxation. These thresholds also depend on the filing status of Social Security beneficiaries.
Individuals with a total gross income, including Social Security, of more than $25,000 will be taxed on up to 50% of their Social Security income. Couples filing jointly will begin to be taxed when their total income exceeds $32,000.
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Individuals earning more than $34,000, or couples with a combined gross income of at least $44,000, will be taxed up to 85% of their SSA benefits.
Normally, only retirees, who have little family income other than their Social Security entitlement, could be exempt from any form of taxation on payments.
How is the tax rate calculated?
The tax rate applied to Social Security payments is similar to that of other forms of income. Filers must submit their adjusted gross income, which combines their salary, SSA benefits and all other sources of taxable income.
If that total exceeds the minimum threshold, at least 50 percent of their Social Security benefits will be considered taxable income and treated as such. The proportion of your total Social Security entitlement that is based on several factors, as mentioned above.