Will 85% of your social security income be taxed due to inflation?

Amid rampant inflation, Social Security payments are set to get a big boost. But that help could have a big consequence: a hefty tax bill.

With inflation running at 8.5% after running as high as 9.1% this year compared to a year ago, people collecting Social Security retirement benefits can expect a tidy cost of living adjustment (COLA) next year . After inflation hit 7% for 2021, Social Security checks increased by 5.9%. For someone receiving the average amount of benefits, that’s an increase of almost $96 a month this year.

But what inflation brings, inflation can also take away.

That’s because when tax time comes, Social Security recipients who increased their income to meet higher costs of gas, food, rent and more could be hit with taxes on 50% even 85 % on a portion of their Social Security income.

For a more in-depth analysis of how a COLA increase could affect your retirement tax liability, consider matching with a financial advisor.

Will You Be Taxed Amidst Social Security Increases?

The income limits are low enough that someone who earns $500 a week, or someone who withdraws a little more than $2,000 a month from a retirement account, could find that his or her Social Security payments are suddenly taxable over 85%.

Even worse: Since half of your Social Security benefits count toward those income limits, your inflation-adjusted monthly benefit check could also put you over the income limit.

While retirees always want to know how much they can make without being taxed, the problem is that while many parts of the tax code automatically adjust for inflation – such as the income levels for tax brackets – the income limits at which Social Security benefits become taxable. have been stuck at the same dollar amounts since the year they were created – 1983 for the tax on 50% of benefits, and 1993 for the tax on 85% of benefits.

These limits apply to what the Social Security Administration calls “combined income” which is calculated like this:

Adjusted gross income from your federal tax return
Plus non-taxable interest income from bonds
Plus half of your Social Security benefits
Your “combined income.”

Adjusted gross income includes wages, dividends, capital gains, business income, most pension income, taxable retirement account distributions. So, if you’re covering the cost of inflation by withdrawing more money from a traditional IRA, 401(k), 403(b) or other taxable retirement account, or if you’re bringing in more income from a job, the amount that’s extra. money can push your combined income over the threshold for taxable benefits. (Withdrawals from a Roth IRA are not included in your adjusted gross income.)

What Are the Income Limits for Social Security Taxes?

The income limits for Social Security taxes are quite low, and are easier to reach with increases in Social Security payments.

Combined income for single filers
Income between $25,000 and $34,000 could trigger income tax on up to 50% of your benefits
Income over $34,000 could trigger income tax on up to 85% of your benefits

Combined income for filers
Income between $32,000 and $44,000 could trigger income tax on up to 50% of your benefits
Income over $44,000 could trigger income tax on up to 85% of your benefits

How this all plays out for each individual or couple depends on how much the inflation-adjusted income tax brackets for your federal tax could drop compared to how much the static Social Security income limits increase your total income.

Social Security benefits were not taxed at all until Pres. Ronald Reagan signed the Social Security reform law of 1993. Beginning in 1984, the income limit for single filers was $25,000 and $32,000 for filers, and only 50% of benefits were subject to tax. In 1993, Pres. Bill Clinton signed the Omnibus Budget Reconciliation Act, which added the 85% taxable benefit rule, setting the limit at $34,000 for single filers and $44,000 for filers.

In the almost thirty years since benefit tax was last adjusted, none of the limits have been raised.

If so, the threshold for tax on 50% of benefits is $72,600 for single filers and $93,000 for filers. The 85% benefit tax limit would be nearly $69,000 for single filers and $89,000 for filers.

The 1984 base tax was expected to affect 10% of Social Security beneficiaries. For the year 2022, the Social Security Administration estimates that about 56% of benefit recipients will have income taxes on their benefits.

Base line

With COLA increases in Social Security payments amid rampant inflation, retirees who are receiving larger payments and increasing their withdrawals from retirement accounts to keep up with the increased cost of living could be subject to a heavy tax penalty. Consult a financial advisor to see how to strategize your investments, withdrawals and taxes accordingly.

Retirement Planning Tips

  • Not sure how an increase in your Social Security payments will affect you? To get a solid long-term financial plan and lower your tax liability, consider talking to a qualified financial advisor. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisor at no cost to decide which one is right for you. If you’re ready to find an advisor to help you achieve your financial goals, get started now.

  • Using SmartAsset’s free retirement calculator can help you determine how much money you’ll need to withdraw from your retirement accounts amid the rising cost of living.

Photo credit: ©iStock.com/DNY59, ©iStock.com/smartstock

The Job Will 85% of your social security income be taxed due to inflation? appeared first on SmartAsset Blog.

Leave a Reply

Your email address will not be published.