A record 8.7% cost-of-living adjustment helped Social Security beneficiaries stave off the effects of inflation in 2023.
But as they file their federal returns this tax season, they may be surprised to find more of their benefit income has been taxed.
Capitol Hill lawmakers on both sides of the aisle have put forth proposals to eliminate those levies on benefit income altogether.
Rep. Angie Craig of Minnesota, who is championing a bill with fellow Democrats, calls the idea a “win-win.”
“It’s a tax cut for seniors and a way to ensure more Americans can depend on the Social Security benefits they’ve earned,” Craig said in a statement.
But experts say eliminating taxes on Social Security benefit income may be a tough ask as the program faces a funding shortfall.
COLAs go up, but tax thresholds stay the same
The 8.7% cost-of-living adjustment, or COLA, for 2023 — prompted by record high inflation — was the biggest annual increase in four decades. The Social Security Administration estimated it would put an extra $140 per month on average in beneficiaries’ monthly checks.
The year before — 2022 — the cost-of-living adjustment was 5.9%.
Both increases were substantially higher than the 2.6% average annual increase to benefits over the past 20 years due to record high increases in prices.
As inflation has started to subside, a 3.2% cost-of-living adjustment for 2024 has come closer to that average.
But even as recent annual adjustments spiked, the thresholds at which Social Security benefits are taxed have stayed the same.
Up to 85% of Social Security benefit income may be taxed.
The levies are applied to combined income, or the sum of half your benefits and total adjusted gross income and nontaxable interest.
If your combined income as an individual tax filer is between $25,000 and $34,000 — or between $32,000 and $44,000 if married and filing jointly — you may pay taxes on up to 50% of your benefits.
If your combined income is more than $34,000 and you file individually — or if you’re married and file jointly and have more than $44,000 in combined income — up to 85% of your benefits may be taxed.
More may owe taxes on Social Security income
This year, some Social Security beneficiaries may see their benefits taxed for the first time, according to the Senior Citizens League. A 2023 survey from the nonpartisan senior group found 23% of respondents who had been receiving Social Security for three or more years paid taxes on their benefits for the first time that year.
That share may increase this tax season following the 8.7% cost-of-living increase in 2023, according to the group.
But just how much more beneficiaries will pay in taxes due to the “unusually large COLA” for 2023 depends on their personal circumstances, said 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.
Over time, because Social Security’s combined income thresholds don’t change, more beneficiaries can expect to pay taxes on the money from their monthly checks.
“At a certain point in the future, essentially everyone will be paying taxes on their Social Security benefits,” said Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center.
Proposals aim to eliminate ‘double tax’
Some lawmakers have decried a so-called “double tax” that those levies on benefits impose after beneficiaries paid into the system through payroll taxes.
“This is simply a way for Congress to obtain more revenue for the federal government at the expense of seniors who have already paid into Social Security,” Rep. Thomas Massie, R-Ky., who is sponsoring the Republican bill, said in a statement.
While both sides of the aisle have proposals to eliminate taxes on Social Security benefits, they differ on how to pay for it.
Craig’s proposal — called the You Earned It, You Keep It Act — would pay for the change with transfers from Treasury general funds and applying the Social Security payroll taxes to earnings over $250,000. Currently in 2024, the first $168,600 in employee wages is subject to the Social Security payroll tax.
The bill, which has seven Democratic co-sponsors, would help increase Social Security’s ability to make benefit payments on time and in full by 20 years, according to an analysis by the program’s chief actuary.
Massie’s proposal — called the Senior Citizens Tax Elimination Act — would pay for the cost of eliminating taxes on benefits through government fund transfers outside of the Social Security trust funds. The proposal, with 30 Republican co-sponsors, would not include any tax increases.
Not a ‘high probability of legislative success’
The idea of nixing taxes on Social Security benefits will likely be popular with the retirees who pay them. More than half of seniors — 58% — said the income thresholds for taxes on Social Security benefits should be updated to today’s dollars, according to a Senior Citizens League survey conducted last year.
But it may be tougher to get the change passed by lawmakers.
“They’re really popular messaging bills,” Sprick said. “But that doesn’t translate to a high probability of legislative success.”
Authorizing general fund transfers to shore up Social Security is “deeply unpopular” in Congress, Sprick said.
Social Security’s tax policies are already progressive, with just around 40% of beneficiaries owing levies on their benefit income, he noted.
Because of that, other changes to help the bottom 60% who do not owe taxes — such as providing higher income replacement for lower earners or a guaranteed level of minimum benefits — may better help those retirees, Sprick suggested.