Will A 5.9% COLA Cause More of Your Social Security Benefits To Be Taxable?
By Rick Delaney, Chairman of the Board
This month your Social Security benefits increase by the highest Cost of Living Adjustment (COLA) of practically any time since most beneficiaries living today have received Social Security. The COLA has been anxiously awaited as household budgets have taken a pummeling from rapidly rising prices over the past year. But with an increase in Social Security income of 5.9%, higher taxes on Social Security benefits could follow for the 2022 tax year.
In a typical year, more than half of all Social Security recipients pay income taxes on a portion of their benefits. But TSCL’s surveys in recent months indicated that the 2020 tax year was anything but typical. The number reporting that they paid taxes on Social Security benefits fell by roughly 10 percent from 2019 tax year to 2020. Now we are surveying again to learn how you expect to fare in the 2021 tax year, and if you think there is a change in the amount of taxes you owe.
In a recent memo to Representative Jason Smith, Ranking Member of the House Committee on the Budget to Congress, Phillip L. Swagel, the Director of the Congressional Budget Office wrote that inflation would cause a greater share of Social Security benefits and investment income to be subject to taxation in the 2022 tax year, the taxes for which will be due April 15, 2023. Up to 85% of Social Security benefits may be taxable for single taxpayers with adjusted gross incomes of more than $25,000, or $32,000 or more for married taxpayers filing joint returns. These income thresholds have never been adjusted for inflation, subjecting a growing number of Social Security recipients to taxation over time as incomes rise.
Another problem is the inflation adjustment for income brackets, and the standard deduction. The index used to adjust those parameters of our income taxes tends to grow more slowly than overall inflation, especially this year. Because it tends to grow more slowly than the COLA, older taxpayers might get bumped into higher tax brackets and find that the standard deduction doesn’t provide quite as much tax relief as it has in previous years.
In the meantime, it’s important that you plan ahead for the 2022 tax year, and you may want to increase your withholdings from Social Security benefits or retirement account checks or make quarterly estimated tax payments. If you need help, we urge you to talk this over with your tax advisor! Check with your local Senior Center to learn if there is free or low-cost tax preparation for seniors in your area.
Your answers to these questions about the taxation issues get attention from journalists, the public and from Members of Congress. Please take time to take our 2022 Senior Survey www.SeniorsLeague.org/2022survey.