For approximately half of retirees, their Social Security check is just like the paycheck they received when working—they don’t get to keep all of it because it gets taxed by the IRS.
If you’re single and your income is between $25,000-$34,000 you pay taxes on 50% of your benefit; above $34,000 you’re taxed on 85%.
If you file taxes jointly and your income is between $32,000-$44,000 you pay taxes on 50% of your benefit; above $44,000 you’re taxed on 85% of your benefit.
But that may be about to end. U.S. Representative Angie Craig has introduced the “You Earned It, You Keep It Act (who names these bills???) that would eliminate federal taxation of Social Security benefits.
It’s common for income tax brackets to be adjusted for inflation every year. But the federal government has never adjusted the brackets for Social Security taxation. In fact, there hasn’t been a single adjustment to the thresholds since the feds started taxing benefits in 1984. Back then, only 10% of retirees paid taxes on their Social Security benefit. Now it’s more than 50% and that number is expected to go even higher in 2023.
Each year, Social Security recipients receive a Cost-of-Living Adjustment (COLA) that is supposed to help them stay even with inflation. The adjustment is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The COLA is set every October based on the increase in inflation from September of the previous year to September of the current year. With one month of reporting to go, early estimates are an increase to Social Security checks in 2023 of 8.6%-8.8%, the largest Cost-of-Living Adjustment in more than 40 years. But the additional money from such a large COLA will push more people across the unadjusted tax brackets forcing them to pay taxes on their Social Security benefits.
The Social Security Administration says taxing benefits “usually only happens if you have other substantial income in addition to your benefits,” such as wages if you’re still working after you begin drawing your benefit or investment income. It’s highly likely that the government definition of “substantial” is much different than yours.
It’s a safe bet the government won’t be magnanimous and eat the loss of taxes currently collected from Social Security recipients. So, how will the money get replaced? Representative Craig claims the tax repeal would be fully replaced by increasing the payroll tax wage cap to $250,000 a year. Right now, Social Security payroll taxes are paid on income up to $147,000 dollars. Craig also claims that her proposed legislation would improve the long-term solvency of Social Security.
The “You Earned It, You Keep It Act” is officially known as H.R. 8717. If it’s passed, taxing Social Security benefits stops at the end of 2022.
