How Does the Social Security Cost-of-Living Increase Affect Taxes?

The large COLA will push some retirees over income thresholds that require them to pay income taxes on part of their Social Security benefit.

Social Security benefits were first taxed in 1984 as part of an overhaul package aimed at stabilizing the program’s finances. While the federal income tax system generally is indexed for inflation, the income thresholds that determine the taxable amount of Social Security benefits are fixed. As benefits rise over time, a greater number of enrollees have found themselves paying income taxes on part of their benefits.

The formula used to determine the tax is unique. First, you determine a figure that Social Security calls combined income (also sometimes called provisional income). This amount is equal to your adjusted gross income plus tax-exempt interest earned on investments plus 50 percent of your Social Security benefits.

Single filers pay no taxes on benefits if their combined income is equal to or below $25,000; the threshold is $32,000 for joint filers. Beneficiaries in the next tier of income — between $25,000 and $34,000 for single filers and between $32,000 and $44,000 for married couples filing jointly — pay taxes on up to 50 percent of their benefits. Beneficiaries with income above those levels pay taxes on up to 85 percent of benefits. Put another way, 15 percent of your benefit will always be tax-free.

Article source: https://www.nytimes.com/2022/10/09/business/retirement/social-security-cola-taxes.html