Inflation hit its highest level in four decades this year, as Social security benefits will get an unusually large size 8.7% COLA (cost of living adjustment) in 2023. This is the largest increase for retirees since 1982 and the fourth largest increase in history. While this is certainly considered good news, the historical COLA can bring two unpleasant surprises.
Here are the retired worker details you need to know.
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More retired workers will have to pay federal income tax on Social Security benefits
Initially, Social Security benefits were exempt from federal income tax. But Congress changed the law in 1983, allowing the benefits to be taxed for people whose incomes exceeded certain thresholds. A second (upper) threshold was added in 1993.
Curiously, these thresholds have never been fitted for inflation. This is problematic because of the advantages to have been adjusted for inflation. In other words, every COLA applied to benefits since 1983 has pushed more benefits above income thresholds. In fact, less than 10% of recipients owed Social Security income taxes when the law went into effect, but that number is around 50% today, and a big COLA in 2023 will add more. impetus to the problem.
In most cases, recipients who derive all of their income from Social Security will not pay tax on the benefits. But those who have additional sources of income – such as a job, 401k distributions, or Traditional IRA distributions – could find themselves on the wrong side of the income thresholds next year.
Tax liability depends on (1) filing status and (2) combined income, which is defined as the sum of modified adjusted gross income plus half of social security benefits. Here are the details:
- Single taxpayers: If the combined income is between $25,000 and $34,000, up to 50% of the Social Security benefits are taxable; if combined income exceeds $34,000, up to 85% of Social Security benefits are taxable.
- Married taxpayers (joint filing): If the combined income is between $32,000 and $44,000, up to 50% of the Social Security benefits are taxable; if combined income exceeds $44,000, up to 85% of Social Security benefits are taxable.
Beneficiaries who owe taxes on Social Security benefits have two options. They can either make estimated quarterly payments to the Internal Revenue Service or request that federal taxes be withheld from benefits by filing a Form W-4V.
It should also be noted that retired workers should bear in mind that 12 States Tax Social Security Benefitstoo.
The Social Security trust fund may have run out sooner than expected
The aging baby boomer population has created a financial problem for the Social Security program: costs are rising faster than incomes. In fact, the Social Security program recorded a deficit of $56 billion in 2021, and this trend is expected to continue indefinitely.
So what? The Social Security Trust Fund is set to run out by 2035, and the program faces a A shortfall of 20 trillion dollars until 2096, according to the board. That doesn’t mean retirees will completely lose their benefits, but it could lead to a pay cut if Congress fails to address the issue. Specifically, if the trust fund is depleted by 2035, income taxes would only cover 80% of the expected benefits.
Unfortunately, the Board had not forecast a COLA of 8.7% in 2023. The projections discussed in the previous paragraph are based on the assumption that benefits would not increase by more than 5.14% l ‘next year. In other words, the unusually high Social Security COLA amount could accelerate the depletion of the Social Security Trust Fund.
On the bright side, politicians in Washington are well aware of the problem, and many government officials have proposed it. potential solutions.
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