Saturday, April 13, 2024

Do You Have to Pay Taxes on Your Social Security Income?

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Editor’s Note: This story comes from Wealthramp.

When it comes to tax season, the abundance of complex forms and intricate calculations can be overwhelming.

Organizing your personal finances can feel like an enormous task, particularly if you’re unsure about the rules.

If you receive Social Security benefits from the government, it’s important to note that this income is subject to taxes. The amount you owe depends on your income and whether you’re filing as an individual or jointly.

To simplify the process, we’ll break down the formula used by the Internal Revenue Service (IRS) to determine your tax liability on Social Security benefits.

Are Social Security benefits taxable?

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Yes, according to the rules set by the IRS, many individuals who receive Social Security benefits are required to pay income tax on that money.

The calculation is based on combined income, which includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits.

How much of your Social Security benefits are taxable?

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Up to 85% of your Social Security benefits are taxable if:

  • You file as an individual and your combined income exceeds $34,000.
  • You file jointly and your combined income with your spouse exceeds $44,000.

Up to 50% of your Social Security benefits are taxable if:

  • You file as an individual and your combined income falls between $25,000 and $34,000.
  • You file jointly and your combined income with your spouse falls between $32,000 and $44,000.

How much should you expect to get this year?

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Social Security recipients and other individuals with fixed incomes will soon see a slight increase in their monthly benefit checks from the U.S. government.

Starting this month, the estimated average monthly retirement benefit will rise by 3.2%, equivalent to $59 per month, for 2024.

This increase is a result of the annual cost-of-living adjustment (COLA) made by the agency. The adjustment will be implemented on a staggered, weekly basis, corresponding to the recipient’s birthday.

Compared to the 8.7% increase observed in 2023, the latest COLA increase is significantly smaller due to a decline in inflation over recent months.

The annual COLA is calculated based on inflation readings from July, August, and September, which were recorded at 2.6%, 3.4%, and 3.5% respectively.

Challenges for Americans on fixed incomes

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However, experts and economists claim that many Americans on fixed incomes, especially seniors, will continue to face financial challenges despite the slowdown in inflation.

Since mid-2020, average prices in the U.S. have risen by over 20%, whereas the total Social Security cost-of-living adjustment has only increased by 17.8% during the same period.

Furthermore, this year’s Medicare Part B premium adjustments will further diminish savings from monthly Social Security checks.

After experiencing a rare reduction in premiums, the standard monthly Part B rate will rise by approximately $10 to $174.70.

How does this year’s COLA adjustment compare with years prior?

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  • 2020: 1.6%
  • 2021: 1.3%
  • 2022: 5.9%
  • 2023: 8.7% (Highest adjustment in last 40 years)
  • 2024: 3.2%

Final thoughts

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While this year’s COLA increase was significantly lower than the last two years, it’s important to note that it’s quite a bit higher than the average over the last 20 years.

However, considering that inflation has also been on the rise, recipients should focus on budgeting to ensure they’re not over spending and putting themselves into a deficit, especially those who are retired.

For those looking for assistance, it may be a good idea to consult a fee-only, fiduciary financial advisor to ensure that you’re not missing anything.

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