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Tax time is here again. For many of us, that means taking a deep breath while going through the tax forms and wondering just how bad the damage will be this time. Will you get a good refund that helps you get caught up on bills, or will you be hit with an unexpected surprise that ruins your springtime plans?
Many seniors have come to expect a certain amount in their tax refund. But this year you might find that Uncle Sam is taking more of a share than you expected. That’s because the tax code hasn’t kept up with the changes in the Cost of Living Adjustment (COLA) in recent years.
Let’s break that down and explain what it all means.
The Basics of Social Security and Income Taxes
If your only income is social security, you might not have to file taxes. But you should file anyway because you might get a refund. At least some of the social security benefit is subject to taxes, and getting that money back can feel like a windfall.
But this year, some who files their tax returns expecting their usual refund might be surprised to learn that even if nothing has changed in their social security income beyond the COLA, they could face an unpleasant surprise when they get that return. It could be much less – in some cases, by hundreds of dollars.
That matters because for many years, the average annual increase in the cost of living adjustment was 2.6%. That often didn’t keep up with the cost of inflation. But in recent years, the COLA increase has been much higher. In 2023, the COLA made waves for how significant it was at 8.7%. In 2022, it was higher than usual at 5.9%.
Those adjustments for cost of living helped many seniors breathe a sigh of relief during a time when prices for everything were going up (and up… and up…).
The adjustments in 2022 and 2023 were the highest increases for cost of living in four decades, according to reporting by CNBC. The Social Security Administration said that the 2023 COLA increase amounted to an average of an extra $140 per month for beneficiaries.
That sort of money can be a game-changer for someone who is living on a fixed income. It can also cover some of the smaller bills that can increase your safety, such as an affordable medical alert system with fall detection.
That’s a good thing, right? So what’s the problem?
During tax time, up to 85% of social security benefits may be taxed. The Social Security Administration estimates that about 40% of beneficiaries will pay taxes on their social security income.1 This often happens because there is other income to report, such as a pension or part-time work.
Here are a few points to remember about filing taxes while collecting social security:
· Taxes are applied to your combined income. That means you pay taxes on half of your benefits and your total adjusted gross income.
· If your combined income as an individual is between $25,000 and $34,000, or between $32,000 and $44,000 when married and filing jointly, you may pay taxes on up to 50% of the social security benefit.
· If your combined income as an individual is more than $34,000, or your income is over $44,000 when filing jointly, you might see up to 85% of your benefits taxed.
If you’re accustomed to getting a refund, that amount might change this year because although the annual adjustment in cost of living has gone way up, the threshold for taxing social security benefits hasn’t changed.
But Why Do Beneficiaries Pay More in Taxes?
Here’s a not so fun fact: The thresholds for social security tax haven’t changed since 1984, the same year the tax was introduced. If the income thresholds for social security had kept pace with the same changes as federal income tax brackets over the years, today only those making over $75,250 as an individual, or those making $96,300 as a joint filer would be required to pay taxes on their social security income.
Many people became aware of the problem in 2022. That year the Senior Citizens League found that 23% of survey respondents paid taxes on their social security benefits for the first time. For some, that meant paying more in taxes; for other seniors that meant a smaller refund.2
So if it feels like taxes continue to eat away at your social security benefits a bit more each year, that’s because they do. And this year might take the biggest chunk yet.
But Wait – Isn’t That Double Taxation?
Many lawmakers consider the tax on social security to be an unfair money grab. That’s because to get social security benefits, you must pay into the system through payroll taxes. Being taxed during your golden years on money that you paid for in taxes in the first place can feel like the government is double-dipping into the funds.
Some lawmakers have proposed challenges to the tax code that would raise the tax thresholds so that seniors can keep more of their social security. Some potential bills would alleviate the tax burden altogether for social security benefits, though you might still pay taxes on other aspects of income, such as a pension or retirement accounts.
Almost 60% of seniors who answered the Senior Citizens League survey believe that tax thresholds should be updated or eliminated altogether, so there’s great support for these changes among constituents. But the odds are that the thresholds won’t change anytime soon, as the proposals tend to fall to the bottom of the list of priorities during an election year.
How to Handle Tax Changes this Year
Fortunately, there’s nothing you need to do differently this year beyond being aware that the amount you owe – or the amount of the refund you receive – might change a bit. For some this will be a disappointing but relatively harmless problem. For others, losing a large chunk of a refund could mean a more difficult time with finances this year.
According to Lending Tree, about 40% of all Americans who receive a tax refund are dependent upon that money to catch up on bills or pay for things they’ve been putting off, such as vehicle repairs or the purchase of a larger household necessity. Some might choose to get something affordable that they really need for themselves, such as a personal alarm button, and sock the rest of the money away in savings for a rainy day.
How to Get Tax Help
If you aren’t sure what your next move is, there are tax professionals that can help.
Free tax help for seniors is available through the Internal Revenue Service. The Tax Counseling for the Elderly grant program, known as TCE, allows for funds that cover the tax filing fees and tax advice for those over the age of 60.3
Most states have a volunteer tax assistance program, which helps seniors and those of lower income file their taxes with little to no fee. Call your state’s Department of Revenue to find out what your options are. Local senior centers may also be able to point you in the right direction.
There are helpful volunteers available through places like AARP, which offers the Tax-Aide Program. This program has been in place since 1968 and has helped more than 78 million taxpayers. They can help with anything from general questions to filing your taxes for you.
For many seniors and elderly adults, preserving good health and getting help fast when needed can be extremely beneficial financially– that’s where a medical alert bracelet or wristband comes in. This affordable medical alert technology can provide strong peace of mind. If you suffer an accident, injury, fall, or any sort of emergency, simply press the button 24/7 to get the help you need.
