In a fiscal twist, Uncle Sam is set to claim a share from numerous Social Security beneficiaries for the first time in 2024. October annually brings anticipation for millions of Americans, awaiting the announcement of next year’s Social Security benefits. Typically, an increment helps offset rising costs, but the hefty 8.7% Cost-of-Living Adjustment (COLA) in 2023 has unveiled an unforeseen consequence for many recipients.
Last year’s significant benefit increase translated into substantial additional payments, yet the fallout extends beyond the windfall. A notable number of Social Security recipients now grapple with an unwanted side effect: a tax burden on their increased income. While earning more is generally positive, the downside surfaces in increased tax obligations, catching some off guard, particularly those who make estimated tax payments without accounting for the impact of heightened income.
A Bigger Social Security Check Comes With Bigger Taxes
The 8.7% COLA, designed to enhance overall income, inadvertently propels certain individuals into higher tax brackets, marking their inaugural encounter with taxation on Social Security benefits. This trend isn’t novel, as evidenced by a recent survey from The Senior Citizens League (TSCL), revealing that 23% of respondents collecting benefits for at least three years faced newfound taxes in 2023.
However, TSCL Social Security and Medicare policy analyst Mary Johnson warns of an exacerbation in 2024. Johnson emphasizes, “We expect the higher Social Security income will not only cause more Social Security recipients to pay taxes on their benefits this tax season, but taxes are taking a bigger portion of Social Security checks in 2024,” underscoring the escalating financial impact on beneficiaries.
While Social Security provides crucial income for many retirees and beneficiaries, a surprising number face the additional hurdle of paying federal income taxes on those benefits. The Social Security Administration estimates that nearly half (40%) of recipients encounter this situation. But will you be one of them? Imagine yourself navigating a financial maze, with each path representing a different tax scenario. Knowing which path leads to potential taxation empowers you to prepare effectively. Worry not, for this guide demystifies the process.
The Tax Thresholds to Take Into Account
The key factor determining your tax fate is your combined income, which includes your adjusted gross income (wages, pensions, interest, etc.) plus half of your Social Security benefits. Think of it as a single income stream for tax purposes. Approximately 40% of Social Security recipients find themselves obligated to pay federal income taxes on their benefits, as reported by the Social Security Administration (SSA).
As the 2023 tax year ended and the 2024 tax season is here, the looming question is whether you will be part of this statistic. The following table succinctly outlines the criteria determining who is subjected to federal income taxes on their Social Security benefits, categorized by federal tax return filing type, combined income, and the corresponding implications.
The federal tax implications for Social Security beneficiaries are delineated based on various criteria, with individual and joint filers facing distinct considerations. For individual filers with a combined income below $25,000, the response is a straightforward “No” to paying federal taxes on Social Security benefits. However, for those falling within the $25,000 to $34,000 range, a “Yes” is warranted, subjecting up to 50% of benefits to taxation. The stakes are even higher for individuals earning above $34,000, where up to 85% of benefits may be federally taxed.
Joint filers encounter a similar progression. Those with a combined income below $32,000 receive a “No” in response to paying federal taxes on Social Security benefits. However, for joint filers falling within the $32,000 to $44,000 range, the answer shifts to “Yes,” with up to 50% of benefits potentially taxed. Joint filers surpassing the $44,000 threshold face the highest level of taxation, with up to 85% of benefits liable to federal taxes.
The scenario changes for married individuals filing separate returns, where the response is a cautious “Probably yes,” highlighting the nuanced considerations for this specific filing category. These distinctions underscore the intricate and sometimes burdensome nature of federal tax obligations for Social Security recipients, with the potential for a significant financial impact depending on individual and joint income levels.
Social Security Benefits Are Taxed in These US States
In the year 2024, there is a noticeable change in the scenery of states taxing Social Security benefits, with Nebraska and Missouri discontinuing this practice. Despite this positive trend, ten states persist in imposing taxes on Social Security recipients. These states are Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. The taxation of Social Security benefits depends on your place of residence, with regulations differing across states. It’s imperative to be aware of the following considerations:
Each state has its own set of rules, necessitating a thorough examination of your specific state’s regulations. Eligibility for deductions and taxable amounts can vary significantly, underscoring the importance of understanding your state’s specific guidelines.
In Colorado, age plays a pivotal role in tax treatment. Individuals aged 65 and above are exempt from state taxes on all federally taxed Social Security. Conversely, retirees under the age of 65 can deduct up to $20,000 from their taxable income.
Connecticut residents should take note of income thresholds. If your adjusted gross income (AGI) is below $75,000 for single filers or $100,000 for joint filers, you can enjoy a 100% exemption on your federally taxed Social Security income.