Social Security recipients will be receiving a notice from the Social Security Administration during the month of December to inform them of the cost-of-living adjustment (COLA) increase to their benefits in 2023. The average retired worker will see a monthly benefits payment of $1,827 an increase of $146. That will translate into an extra $1,752 over the course of next year.
Unfortunately, the IRS doesn’t use the same inflation figures to calculate their adjustment to income thresholds, standard deductions and credit amounts. Most taxpayers over 65 will only be able to take an additional $1,500 through the standard deduction when they file 2023 tax returns in 2024. Not to mention those increased benefits could get taxed at a higher rate.
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Why the standard deduction for seniors is less than SSA COLA increase
The Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate the annual COLA. However, under the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS now uses the Chained Consumer Price Index (C-CPI) to index tax provisions. The latter is generally outpaced by the former with the IRS annual adjustment coming in at nearly 7 percent versus the COLA increase of 8.7 percent for 2023.
Standard deductions in 2023
The standard deduction increases in 2023 will be as follows, $13,850 for single filer or married but filing separately, $20,800 for head of households and $27,700 for married taxpayers filing jointly.
An additional standard deduction of $1,500 will apply to those who are either 65 and older or blind, and the amount doubles if both apply to a taxpayer in 2023. The amount for those that are unmarried and not a surviving spouse will be $1,850 in 2023.
Dependents that can be claimed on another person’s tax return for the 2023 fiscal year are limited to a standard deduction of either $1,250 or your earned income plus $400, whichever is greater. However, the total can’t exceed the basic standard deduction for your filing status.
| Filing status | 2022 | 2023 |
|---|---|---|
| Single filers & Married couples filing separately | $12,950 | $13,850 |
| Married couples filing jointly & surviving spouses | $25,900 | $27,700 |
| Head of Household | $19,400 | $20,800 |
How are Social Security payments taxed?
The tax rate for Social Security benefits varies based on a number of factors aside from just age; and thehousehold income of recipientsis the main deciding factor in taxation. Those thresholds are also dependent on thefiling statusof Social Security recipients.
Individuals with aTotal Gross Income, including Social Security, ofmore than $25,000will be taxed on up to 50 percent of their Social Security income. Couples who file jointly will begin being taxed when their total income exceeds$32,000.
Individuals earningmore than $34,000, or couples with a combined gross income of at least$44,000, will be taxed on up to 85 percent of their Social Security benefits.
These amounts are not indexed to inflation which means, over time, more and more recipients have had to pay taxes on Social Security benefits. Typically it is onlyretirees, who have very little household income aside from their Social Security entitlement, who could be exempt from any form of taxation on the payments.
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How is the Social Security tax rate calculated?
The rate of taxation levied on Social Security payments is similar to that of other forms of income. Filers must submit theiradjusted gross income, which combines their salary, Social Security benefits and all other sources of taxable income.
If that total exceeds the minimum threshold thenat least 50 percent of your Social Security benefits will be considered taxable incomeand will be treated as such. The proportion of your total Social Security entitlement that is based on several factors, as mentioned above.
As an enthusiast deeply versed in the intricacies of Social Security, tax regulations, and fiscal policy, I draw upon my extensive knowledge to shed light on the intricate relationship between Social Security benefits, cost-of-living adjustments (COLA), and income tax implications for seniors.
The announcement that Social Security recipients will be receiving a notice detailing the COLA increase in 2023 is grounded in the Social Security Administration's meticulous use of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate this adjustment. Notably, the average retired worker is set to enjoy a monthly benefits increase of $146, resulting in a substantial $1,752 boost over the course of the following year.
However, the nuanced intersection between Social Security benefits and income tax becomes apparent when juxtaposed with the IRS's approach. Unfortunately, the Internal Revenue Service doesn't align its inflation figures with those used by the Social Security Administration. This incongruence is exacerbated by the IRS's adoption of the Chained Consumer Price Index (C-CPI) under the Tax Cuts and Jobs Act of 2017, a metric generally outpaced by the CPI-W. In 2023, the IRS's annual adjustment hovers around 7 percent, compared to the COLA increase of 8.7 percent.
This discrepancy has direct consequences for taxpayers over 65, as the standard deduction for seniors falls short of the Social Security COLA increase. The standard deduction for 2023 sees increments across different filing statuses, with an additional $1,500 for individuals aged 65 and older or blind, a figure that doubles if both conditions apply.
The tax implications of Social Security benefits are further elucidated by the income tax brackets for 2023. Individuals and couples face varying taxation rates based on their total gross income, including Social Security. The thresholds for taxation range from $25,000 for individuals to $44,000 for couples filing jointly, with tax rates of up to 85 percent on Social Security benefits for those exceeding these thresholds.
Crucially, these thresholds are not indexed to inflation, leading to a scenario where more recipients may find themselves subject to taxes on their Social Security benefits over time. Exceptions exist for retirees with minimal household income apart from Social Security entitlements.
In essence, the intricacies of Social Security taxation involve the careful consideration of COLA adjustments, income tax brackets, and the evolving landscape of fiscal policy—a domain where the expertise of an enthusiast or expert proves invaluable.
