In mid-October, the Social Security Administration announced a number of key changes to the program that are set to take place in 2023. And several of them are positive changes for seniors.
For example, starting in January, Social Security benefits will be subject to an 8.7% cost-of-living adjustment. Once that’s implemented, the average monthly benefit is expected to increase from $1,681 to $1,827.
Seniors who work and collect Social Security at the same time will also be subject to a higher earnings-test limit. That means they’ll have the option to earn more money before risking having some of their benefits temporarily withheld.
But there’s one important Social Security change that won’t be coming down the pike in 2023. And because of that, a large number of seniors may end up losing a chunk of their benefits to federal taxes.
Income thresholds that are stuck in time
For many years, Social Security benefits weren’t subject to federal taxes. But in 1983, lawmakers changed the rules and implemented income thresholds that, once exceeded, would result in taxes on up to 50% of benefits. In 1993, an additional income tier was put into place to establish guidelines for taxing up to 85% of benefits.
Both tiers, however, are extremely low given the cost of living today. Taxes on up to 50% of benefits apply to a provisional income (which is the sum of non-Social Security income plus 50% of annual benefits) of $25,000 to $34,000 for singles, and a provisional income of $32,000 to $44,000 for married couples filing a joint tax return. Meanwhile, taxes on up to 85% of benefits apply to a provisional income beyond $34,000 for singles and $44,000 for married folks.
If these income tiers seem unreasonable, it’s because they were established decades ago and haven’t increased since — despite a clear uptick in living costs through the years. In fact, when we think about it, keeping these tiers in place for such a long time makes zero sense.
Social Security benefits are subject to annual cost-of-living adjusrments — COLAs — that are pegged directly to the rate of inflation. So why shouldn’t the thresholds for provisional income evolve to follow suit?
But unfortunately, the Social Security Administration doesn’t seem all too eager to make adjustments to these income thresholds or change the rules to account for inflation. And as such, come 2023, these tiers will continue to apply — and many seniors will inevitably lose a chunk of their Social Security income to taxes even if they’re not wealthy at all.
A much-needed change
The fact that Social Security benefits are eligible for annual COLAs is a good thing, as are certain other changes to the program that tend to be implemented year after year. But one major change that’s been missing from the mix is an adjustment to the income thresholds for taxes on Social Security benefits. And until lawmakers get moving in that regard, seniors will unfortunately continue to lose a bunch of the income they no doubt rely on heavily.
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