Retired Americans received the highest Social Security cost-of-living adjustment (COLA) in 41 years this year — 8.7 percent. While that sounds like good news, The Motley Fool says it could end of costing some seniors a lot of money thanks to an outdated rule regarding income tax.
Seniors don’t automatically pay taxes on their Social Security benefits. That is determined based on your provisional income, which is basically your modified adjusted gross income plus half of your annual Social Security benefit. The problem is the provisional-income thresholds were set decades ago.
Right now, as a single tax filer, you pay federal taxes on up to 50 percent of your Social Security benefits if your provisional income falls between $25,000 and $34,000. Beyond $34,000, you could face taxes on up to 85 percent of your benefits. If you’re married and filing a joint tax return with your spouse, you will pay taxes on Social Security benefits if your provisional income falls between $32,000 and $44,000. If you make more than $44,000, up to 85 percent of your benefits could be taxed.
This year’s giant COLA could result in more seniors having to pay taxes on their benefits. That would take away the extra income they were given to help offset rising costs due to inflation — ultimately hurting seniors financially.
The Seniors Trust is devoted to improving Social Security for all retirees. It wants Congress to enact the Social Security Expansion Act that will establish a fair COLA, increase benefits, create a strong and long-lasting trust fund, and guarantee every retired worker receives adequate Social Security benefits they have earned.