Every year, the Social Security Administration announces a cost-of-living adjustment for Social Security benefits, known as COLA, for the upcoming year. For 2024, the COLA will be 3.2%. This means retirees can expect to see an increase of 3.2% in their monthly checks.
Whenever you have an income change, it can be a good time to evaluate taxes. If you’re retired and receiving Social Security benefits, you may want to check what you paid last year in taxes. You can also look ahead so you know what to expect in the coming year.
To see how your Social Security tax bill could be affected, it can be helpful to look at:
— How the COLA works.
— Adjustments to the tax brackets.
— Taxes on Social Security benefits.
— Thresholds for paying taxes on benefits.
— Additional tax changes for retirees.
— How to plan for taxes.
[READ: What Will the Social Security COLA Raise Be for 2024?]
How the Social Security COLA Works
The COLA aims to protect Social Security benefits from the eroding effect of inflation. Every year, the Social Security Administration reviews how prices have changed. This includes comparing the consumer price index in the third quarter of the current year to the consumer price index in the third quarter of the previous year. The result is used to determine the COLA for the following year.
The 8.7% COLA increase in 2023 was the largest for Social Security benefits in more than 40 years. This reflected inflation hitting the highest levels in the past four decades during 2022. For 2024, the 3.2% COLA increase resulted from inflation during 2023.
In October 2023, the average retirement benefit was $1,796.31. With the next COLA increase, that amount will go up by $57.48 each month. This comes to an average retirement benefit of $1,853.79 every month in 2024.
Adjustments to the Tax Brackets
As you look at your increased benefits, you can compare the amount to the tax brackets. “While additional income could bump you into a new tax bracket, the IRS has already made adjustments to accommodate the increased cost of living,” David Globke, vice president of SFA Wealth Management in Murfreesboro, Tennessee, said in an email.
The IRS increased income thresholds by 5.4% for each tax bracket in 2024. “This increase is designed to keep taxpayers in their current tax bracket if their additional income is simply keeping up with the higher cost of living,” Globke said. “The standard deduction for income tax filings in 2024 will also be 5.4% higher.”
Taxes on Social Security Benefits
The tax table for Social Security benefits went into effect in 1984. At that time, it was determined that up to 50% of the benefit could be taxable. The portion of benefits subject to taxation increased to 85% in 1993 and hasn’t changed since.
When the tax was first implemented, fewer than 10% of those receiving Social Security payments had their benefits taxed. By 2015, over half of families receiving Social Security payments paid taxes related to their benefit.
“What truly affects taxes in retirement is the type of income and how much of that income a retiree will take during their golden years,” Kevin Chancellor, founder of Black Lab Financial Services in Melbourne, Florida, said in an email. “A tax increase or decrease will depend on a person’s current Social Security benefits as well as how much and what types of other income they take.”
[Related:Social Security COLA 2024: What to Do With the Extra Money]
Thresholds for Paying Taxes on Social Security Benefits
Social Security benefits undergo a formula to determine whether taxes will be applied. It is calculated by taking 50% of your Social Security payment and adding the following:
— Earned income such as wages, salary or tips.
— Taxable interest.
— Dividends.
— Pensions and annuities.
— Any other income.
— Nontaxable interest.
The sum is then compared to the amounts listed on the tax table for Social Security. Couples who are married filing jointly and have a total of $32,000 or less will not pay taxes on their Social Security benefit. If they make between $32,000 and $44,000, up to 50% of the benefit can be taxed. For an amount that is over $44,000, up to 85% of the Social Security benefit is taxable. For individuals who file as single, any amount up to $25,000 will not be taxed. For a sum between $25,000 and $34,000, up to 50% of the benefit can be taxable. For income totals that are above $34,000, 85% of the Social Security benefit could be taxable.
Additional Tax Changes for Retirees
In 2024, the qualified charitable distribution limit will be linked to inflation. For 2023, you could give up to $100,000 as a tax-free distribution to a qualifying charity directly out of an IRA. For 2024, it will be $105,000. “A retiree can give to a charity of their choice without having to pay the income taxes on that distribution,” Chancellor said.
The annual gift amount limit also increases from $17,000 per person or $34,000 for married couples to $18,000 per person or $36,000 for married couples in 2024. “Having a gifting strategy in place can help reduce future estate taxes if a person or couple does not exceed their maximum lifetime gifting amount,” Chancellor said. The IRS allows an individual to give away up to $13.61 million during their lifetime.
[SEE: 7 New Taxes Retirees Face.]
How to Plan for Social Security Taxes
Some states tax Social Security benefits, so you’ll want to check if your income will be taxable based on your location. Twelve states tax at least some of the Social Security benefits that residents receive. These include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia.
“Retirees should look at state income tax breaks,” Wesley Botto, a certified financial planner at Hillcrest Financial Group in Cincinnati, said in an email. “In Kentucky, there is a $31,110 exclusion for income from retirement plans such as 401(k)s, pensions and IRAs.”
You can also look for adjustments to other income streams. Your pension might not have a cost of living adjustment, for instance. Other distributions could be higher, resulting in more income. “Many retirees are collecting more than 5% interest on CDs (certificates of deposit) or money markets,” Botto said. “This interest income could offset any help that a 2024 COLA to the income tax tables provided.”
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How the 2024 Social Security COLA May Impact Retiree Tax Bills originally appeared on usnews.com
Update 12/11/23: This story was previously published at an earlier date and has been updated with new information.
