2023 Tax Hike on Social Security: Can Congress Turn the Tide?

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In 2023, Social Security beneficiaries were able to offset the impact of inflation with a significant 8.7% cost-of-living adjustment. However, when individuals submit their federal returns this tax season, they might be taken aback to discover that a larger portion of their benefit income has been subjected to taxes.

Lawmakers on Capitol Hill from different political parties have introduced plans to completely remove taxes on benefit income.

Angie Craig, a representative from Minnesota, is leading a bill with other Democrats and describes the idea as a “win-win.” Craig emphasized that the tax cut benefits seniors and aims to provide more Americans with reliable Social Security benefits.

However, eliminating taxes on Social Security benefit income could be challenging given the program’s funding shortfall.

COLAs go up, but tax thresholds stay the same

The 8.7% cost-of-living adjustment for 2023, driven by record high inflation, marked the largest annual increase in forty years. The Social Security Administration projected an additional $140 per month, on average, to be included in beneficiaries’ monthly checks.

In the previous year, 2022, the cost-of-living adjustment was 5.9%.

Both rises were significantly greater than the 2.6% average annual increase in benefits over the last two decades, driven by record high price hikes.

With inflation beginning to decrease, a 3.2% cost-of-living adjustment for 2024 is now more in line with the average.

Despite the recent increase in annual adjustments, the thresholds for taxing Social Security benefits have remained unchanged.

As much as 85% of your Social Security benefit income could be subject to taxation.

Levies are imposed on the combined income, which is calculated as half of your benefits plus total adjusted gross income and nontaxable interest.

For individuals with a combined income of $25,000 to $34,000, or $32,000 to $44,000 for married couples filing jointly, taxes may be owed on up to 50% of benefits.

If your total income exceeds $34,000 when filing individually or $44,000 when filing jointly as a married couple, up to 85% of your benefits could be subject to taxation.

More may owe taxes on Social Security income

It has been reported that this year, certain Social Security beneficiaries might face taxes on their benefits for the first time, as per the Senior Citizens League. According to a 2023 survey conducted by a nonpartisan senior group, 23% of respondents who had been receiving Social Security for three or more years reported paying taxes on their benefits for the first time that year.

The share is expected to rise this tax season due to the 8.7% cost-of-living increase in 2023, as per the group’s findings.

Beneficiaries may face increased taxes in 2023 due to the significant COLA, with the exact impact varying based on individual circumstances, according to Tim Steffen, a certified financial planner and the director of advanced planning at Baird.

“Whenever income is up, it’s reasonable to expect your tax liability to be as well, although that really depends on other income and deductions [you] might have between last year and this year, too,” Steffen said.

As time goes by, due to the unchanging combined income thresholds of Social Security, a growing number of beneficiaries may find themselves owing taxes on the funds they receive in their monthly checks.

“In the future, almost everyone will be required to pay taxes on their Social Security benefits,” stated Emerson Sprick, who works as the associate director of economic policy at the Bipartisan Policy Center.

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Proposals aim to eliminate ‘double tax’

Some legislators have criticized the concept of a “double tax” that occurs when beneficiaries are taxed on benefits they have already contributed to through payroll taxes.

“This is just a method for Congress to generate additional revenue for the federal government, impacting seniors who have already contributed to Social Security,” stated Rep. Thomas Massie, R-Ky., the sponsor of the Republican bill.

Both political parties have suggestions for removing taxes on Social Security benefits, but they have different approaches to funding it.

Craig has put forward a proposal named the You Earned It, You Keep It Act, which aims to fund the change by transferring funds from Treasury general funds and extending the Social Security payroll taxes to earnings over $250,000. In 2024, the initial $168,600 of employee wages is subject to the Social Security payroll tax.

The bill, supported by seven Democratic co-sponsors, aims to extend Social Security’s capacity to deliver benefit payments on schedule and in full by two decades, as per an evaluation by the program’s chief actuary.

Massie’s proposal, known as the Senior Citizens Tax Elimination Act, aims to cover the expenses of removing taxes on benefits by transferring funds from the government outside of the Social Security trust funds. The proposal, supported by 30 Republican co-sponsors, does not involve any tax hikes.

Unlikely to succeed in legislation

Retirees are likely to appreciate the proposal to eliminate taxes on Social Security benefits. Over half of seniors, specifically 58%, expressed the need for updating income thresholds for taxes on Social Security benefits to reflect current values, as per a survey by the Senior Citizens League conducted last year.

However, it could prove challenging to secure approval from legislators.

“They’re quite popular messaging bills,” Sprick mentioned. “However, this does not necessarily indicate a strong chance of passing legislation.”

Approving general fund transfers to support Social Security is not well-received in Congress, according to Sprick.

The tax policies of Social Security are already progressive, as approximately 40% of beneficiaries are required to pay taxes on their benefit income, according to him.

Considering this, additional adjustments to assist the bottom 60% who are not liable for taxes — like offering increased income support for individuals with lower earnings or ensuring a minimum level of benefits — could be more beneficial for these retirees, as proposed by Sprick.

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