More people will pay taxes because benefits for the upcoming year will increase at their steepest rates in 42 years.
It appears to be such good news: Social Security benefits will increase by 8.7% next year due to inflation. However, many people’s tax bills may rise as well.
This is because Social Security benefit tax rates do not change in line with inflation.
Social Security benefits were first taxed in 1984 as part of a comprehensive reform of the system. It was designed to tax the most affluent recipients.
But as the cost of living rose annually over time, more and more people became eligible for the tax. More people will pay taxes because benefits for the upcoming year will increase at their steepest rates in 42 years.
In January, the average retired worker’s monthly benefit will increase from $1,681 to $1,827. The monthly payments for an elderly couple receiving benefits would increase from $2,734 to $2,972.
Californians receiving benefits who pay no state taxes number around 6 million.
The taxation of federal benefits is based on a complicated formula involving what is known as “combined income.” If an individual’s income is between $25,000 and $34,000, they may have to pay tax on up to 50% of their benefits. A higher income may result in up to 85% of their benefits being taxed.
If a couple filing jointly has a combined income between $32,000 and $44,000, they may have to pay tax on up to 50% of benefits. If the income exceeds $44,000, the benefits may be taxed at up to 85%.
In 2014, the income taxation of Social Security benefits was estimated to have an impact on more than 25 million beneficiaries of Social Security or close to half of all beneficiaries. This is nearly double the number in 1998.
Since then, higher standard deductions are thought to have helped to stabilize the percentage. Inflation will cause the standard deduction to rise again next year.
The income thresholds used to calculate the taxable share of benefits are not inflation or wage growth-indexed, so the CBO warned that “That share (of beneficiaries paying the tax) is expected to grow over time.”
The Republican Study Committee, the conservative policy arm of the House, has proposed eliminating the benefits tax gradually starting in 2051, arguing that “retirees receiving Social Security benefits should not be penalized for remaining active.”
This proposal is one of 122 pages of budgetary information that covers numerous federal programs. Next year, the House of Representatives will be under Republican control, while the Senate and the White House will be under Democratic control.
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