Counting down to Social Security COLA: Taking time to add up the costs is essential.
Everyone knows receiving more money in your check is always a positive thing. Especially if you are retired and living on a monthly fixed income. Anytime you have to pay more money for groceries, receiving news of additional income is welcoming.
In general, the cost-of-living adjustment to Social Security next year will be a good thing. But it could create more complexity when retirees go to file their taxes. The increase could make more of a retiree's benefits count as taxable income. If you know anything about Social Security, then you know the COLA adjustment this year could be the largest in 40 years. But some financial experts are saying a high increase could lead to a tax headache for some retirees.
According to the Social Security Administration, Some people who get Social Security must pay federal income taxes on their benefits. However, no one pays taxes on more than 85% percent of their Social Security benefits. You must pay taxes on your benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000. If you file a joint return, you must pay taxes if you and your spouse have a “combined income” of more than $32,000. If you are married and file a separate return, you probably will have to pay taxes on your benefits.
An 8% or 9% COLA increase is not huge if the increase is in the single digits. But it could push more of your Social Security benefits into taxable income. In the example above, where monthly Social Security benefits are $2,200, a 9% COLA increase would raise your monthly benefits by $198 to $2,398 and your annual benefits to $28,776. Add half of this ($14,388) to your adjusted gross income of $25,000 and your combined income is now $39,388.
The COLA increase will by and large be a positive thing for retirees in the Social Security program and it's needed as well because the cost of living is now much higher due to inflation.Knowing ahead of time whether or not you will be paying taxes on the benefits is important. Simply because there are ways to lower the tax burden on your Social Security benefits, you need to know where you stand before you can act.