Like many retirees and those planning an imminent retirement, you might have felt thrilled to hear of the recent cost of living adjustment to Social Security benefits. The 8.7 percent increase represented one of the largest-ever adjustments to monthly checks, and surely helps retirees struggling with the recent burst of inflation. But before you celebrate, make sure you’ve planned for one potential unintended consequence of the new, higher payments.
Those of you who draw income from other sources, whether from employment or retirement income, should consider the potential impact upon your income taxes. Because Social Security is combined with other income when determining your tax bracket, a higher Social Security check could potentially bump you up to a higher bracket.
The IRS considers something called your “combined income” which is composed of your adjustable gross income, plus nontaxable interest, plus half of your Social Security benefits. When that combined income goes above certain thresholds, part of your Social Security benefits are subject to taxation.
For single taxpayers, a combined income above $25,000 annually will mean that 50 percent of your Social Security benefits can be taxed. And when that income goes above $34,000, 85 percent of benefits will be affected.
If you’re married, combined income above $32,000 means 50 percent of your Social Security payments are subject to tax, and 85 percent of those payments can be taxed if your combined income goes above $44,000.
It’s important to remember that those figures of 50 and 85 percent are not the tax rate. It means that a percentage of your Social Security benefits can be taxed as income, at the rate otherwise imposed by the federal government and possibly your state (some states tax Social Security benefits, while some do not).
Essentially, for some retirees the recent COLA could mean that they jump into a higher bracket regarding their taxable combined income. But for more information on this topic and how it affects you, it is best to speak to us one on one. We can help you estimate your combined income for 2023 and investigate ways to minimize the impact on your income taxes.