By Doug Osborne, TSCL Legislative Liaison
Recently we received the following from one of our members:
“I’m trying to find out if anyone is aware of the IRS (tax) cliff that seniors on Social Security are facing? With the current COLA increase and possibly a larger increase next year, seniors are most likely to lose any raise due to the tax rule for a married couple making over $32,000, or a single filer making over $25,000; will have to pay tax on half of their Social Security if they are even a dollar over that limit. With the COLA increase seniors could wind up paying more in taxes than what the COLA increase is in some cases, and this will continue every year because high inflation and the COLA put them over that limit. This limit has not been changed since 1983 or adjusted for inflation, your help would be greatly appreciated.”
Yes, TSCL is aware of the tax cliff faced by Social Security recipients and is working with Members of Congress to address the problem. A significant number of retired and disabled Social Security recipients are likely to face higher taxes during the 2023 tax season due to the 5.9% COLA in 2022, and another expected high COLA in 2023 which we are currently forecasting to be around 8.6% based on consumer price data through May 2022. Congress does know there’s a problem, but it’s not on the front burner yet. We need your help to change that!
Are you affected? As many as half of all Social Security households pay federal income taxes on a portion of their benefits. As much as 85% of Social Security benefits can be taxable for Social Security recipients whose “provisional income” is higher than the income thresholds that were set by law in 1983. Provisional income is figured by adding your adjusted gross income, plus certain otherwise tax-exempt income, to 50% of your Social Security benefits.
As you point out the income thresholds have not been changed since 1983 unlike tax brackets which are adjusted annually. Thus, each year more Social Security recipients are impacted by the tax when their benefits are adjusted for the COLA. The 5.9% COLA this year and the COLA which we anticipate for 2023 are the highest COLAs in 4 decades, and sure to cause record numbers of Social Security recipients to pay tax on a portion of their benefits for the first time. So far though, TSCL does not know of any legislation that would permanently adjust these income thresholds over the long term — a problem we are working to change.
Here’s how the calculation of taxable Social Security benefits works. The following table is from the IRS Publication #915 Social Security and Equivalent Railroad Retirement Benefits:
Calculation of Taxable Portion of Social Security Benefits
|Provisional Income||Taxable Social Security Benefits|
|(A.) Less than $25,000||None|
|(B.) $25,000 to $34,000||Lesser of 50% of benefits or 50% of provisional income above $25,000 (maximum of $4,500)|
|(C.) Greater than $34,000||Lesser of 85% of benefits or 85% of provisional income above $34,000, plus income from line (B.)|
|(D.) Less than $32,000||None|
|(E.) $32,000 to $44,000||Lesser of 50% of benefits or 50% of provisional income above $32,000 (maximum $6,000)|
|(F.) Greater than $44,000||Lesser of 85% of benefits or 85% of provisional income above $44,000 plus amount from line (E.)|
To better understand just how much of your Social Security benefits are taxable, you can find a worksheet in the IRS 1040 instructions.
It’s important to note that revenues from the taxation of Social Security benefits flow into the Social Security and Medicare Trust Funds to help pay benefits. The 50% level of taxation goes to the Social Security Trust Fund, and the 85% level goes to the Medicare hospital insurance Trust Funds. Lawmakers could look for new sources of revenues, to offset the loss of revenues by adjusting the income threshold. A temporary fix is simply to specify that the Trust Funds be “held harmless” or made whole from general revenues.
Rest assured, we are discussing this issue in our contacts with Congress. To learn more, watch your email for TSCL’s Weekly Updates.