Tax Burden May Rise for Some Seniors as Social Security Benefits Increase Next Year

Date:

By David Lightman, The Sacramento Bee (TNS)

It seems like such good news: Social Security benefits are going up 8.7% next year, thanks to inflation. But for many people, their tax bill could also go up.

That’s because tax rates on Social Security benefits don’t change with inflation.

Taxation of Social Security benefits began in 1984 as part of a major overhaul of the system. It was intended to tax the wealthiest recipients.

But over the years, as the annual cost of living rose, more and more people became eligible for the tax. With benefits reaching their steepest level in 42 years next year, more people will have to pay taxes.

“This is really a middle class problem. You’re hitting the middle earner, even low-income people,” said Mary Johnson, social security and health care policy analyst with the nonpartisan Senior Citizens League. “It’s really going to be a very negative surprise.”

The average retired worker’s monthly benefit will increase from $1,681 to $1,827 in January. An elderly couple who both receive benefits would see their monthly amounts increase from $2,734 to $2,972.

About 6 million Californians receive state-tax-free benefits.

Federal distribution tax is based on a complex formula that involves what is called “combined income.” If that income for an individual is between $25,000 and $34,000, they can pay taxes on up to 50% of their benefits. If the income is higher, up to 85% of their benefit may be taxable.

Those who file a joint return can pay tax on up to 50% of the distributions if their combined income is between $32,000 and $44,000. If income exceeds $44,000, benefits may be taxed at a rate of up to 85%.

“Lower-income beneficiaries may owe federal taxes as a result of the increase in Social Security benefits,” as their total “combined income” may have increased, said Jodie Rolih, a CPA and senior tax manager at Sensiba San Filippo in Pleasanton, Calif.

The Congressional Budget Office estimated that nearly half of Social Security beneficiaries, or more than 25 million people, were affected by the income tax on Social Security benefits in 2014. That is almost twice as many as in 1998.

The rate is believed to have stabilized somewhat since then due to higher default deductions. Next year, the standard deduction will go up again because of inflation.

But CBO cautioned, “That share (of beneficiaries paying the tax) is expected to grow over time because the income thresholds used to determine the taxable portion of benefits are not indexed for inflation or wage growth. “

The antidote to higher taxes seems simple.

“The taxable maximum wage should also increase as wages rise,” said Garrett Watson, a senior policy analyst at the Tax Foundation in Washington.

“That way, there remains a correlation between benefit growth and contributions over time,” he said.

There seems to be little incentive to change the law.

“There has been a reluctance to change individual pieces without a broader view of Social Security,” said David Certner, AARP legislative advisor. The tax was designed to boost Social Security finances, which are expected to face more problems in the coming years.

One plan comes from the Republican Study Committee, the conservative policy arm of the House, and has proposed phasing out the distribution tax starting in 2051, saying, “Retirees who earn Social Security benefits should not be penalized for remaining active.

That plan is part of a 122-page budget proposal that covers a wide variety of federal programs. Republicans will control the House of Representatives next year, although Democrats will control the Senate and White House.

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©2022 Sacramento Bee. Visit at sacbee.com. Distributed by Tribune Content Agency LLC.

The Valley Voice
The Valley Voicehttp://thevalleyvoice.org
Christopher Brito is a social media producer and trending writer for The Valley Voice, with a focus on sports and stories related to race and culture.

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