Beginning January 2023, Social Security checks will increase a whopping 8.7%! This is the largest increase in 41 years… and comes on the heels of a 5.9% raise in 2022. To top that off, Medicare premiums will actually decrease a small amount in 2023. This is great news, but beware! Uncle Sam may think it’s great news as well.
You may not even realize that your Social Security benefits can be taxed, and that they can cause your other income to be taxed more. The Reagan and Clinton administrations introduced thresholds at which up to 85% of your Social Security benefits can be taxed. Adding insult to injury, these thresholds have never been adjusted for inflation and are quite low. The highest threshold of non-taxable Social Security benefits currently sits at $44,000.
Of course, like almost anything coming out of Washington, it’s complicated. So, let’s break it down into bite-sized pieces:
- You can be taxed on 0% up to 85% of your Social Security Benefits. (Technically, this could be higher if you are under Full Retirement Age, but we will ignore that for the purpose of this commentary.)
- The amount taxed is determined using the following calculation:
= (Social Security Benefits /2) + Adjusted Gross Income (AGI excluding SS benefits) + Tax-exempt Interest
- Up to 50% becomes taxable over $25,000 ($32,000)
- Up to 85% becomes taxable over $34,000 ($44,000)
Your taxable benefits don’t balloon at those levels, but they do start increasing your effective tax rate exponentially. You may be taking money from an IRA or converting dollars to a Roth IRA each year. This is where you need to pay particular attention. You might get a nasty surprise for 2023 - or even 2022.
Even if you have income that is set in stone, make sure you are withholding enough. You may not get to keep what you think you will from these cost-of-living increases.
Furthermore, you may have to fork over some additional cash come tax time. You might not even be aware of what the 2022 increase has done to your tax situation. If you are a late tax filer, this might pile up on you to pay in for 2022 and catch-up on estimated payments for 2023.
It will be more important than ever before to work with your tax professional to know where you land. Don’t have one? Let us help you through our tax and accounting firm: Briscoe and Associates, LLC. If you have questions, reach out. We’re here to help.