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In 2024, the Social Security cost-of-living adjustment will raise benefits by 3.2%. At the same time, income-tax brackets are going up an average of 5.4%, according to the Internal Revenue Service. Both of those increases are because of inflation.
What will not change is the threshold for how much income retirees can have before they must pay tax on their monthly Social Security benefits. And that means that next year, more than half of those receiving government retirement checks will pay tax on those benefits.
Among those who file a tax return, that number goes up to 72% or more, according to IRS statistics.
“It’s pretty rare when I have a client who isn’t paying tax on Social Security benefits,” says Phyllis Jo Kubey, a tax specialist and financial planner who practices in New York. “It just doesn’t take much to go over the limit.”
The income thresholds for the taxation of Social Security benefits haven’t budged in decades. This is the basic rubric:
- Single taxpayers with modified adjusted gross income between $25,000 and $34,000 may have to pay federal tax on up to 50% of benefits. Singles who make more than $34,000 could be taxed on up to 85% of benefits.
- For married taxpayers filing jointly, the modified adjusted gross income range is $32,000 to $44,000 for the 50% threshold and over $44,000 for the 85% threshold.
Back in 1984, when the government first started to tax Social Security benefits, making that much money a year was considered a pretty good living, and only 10% of beneficiaries were subject to the tax. But because those brackets are not adjusted for inflation, the number of people who have to pay just keeps growing. A Social Security report on this phenomenon says that not only does the number of people who must pay these taxes climb inexorably, but so does the percentage of income they owe.
The issue is compounded by a similar issue with the Medicare surcharges known as IRMAAs, which add to the cost of healthcare benefits for those with modified adjusted gross income over limits that are also were not regularly adjusted for inflation and now are done differently than most other adjustments. The lowest IRMAA threshold for 2024 will be $103,000 for single people and $206,000 for married couples filing jointly, and that goes up over six tiers, until you get to a threshold of $500,000 for single people or $750,000 for couples.
“It feels like a second dip of the government’s hand into the cookie jar,” says Harry Sit, founder of the blog TheFinanceBuff.com.
How to manage taxes on Social Security
The first key to managing taxes on Social Security is to understand them and plan accordingly. “Individuals who make higher income, they’re having to pay more out of pocket and receive less in Social Security,” says Devin Carroll, a Social Security expert who founded the blog Social Security Intelligence.
But know that what counts as “higher income” for this purpose is not what you might usually consider as meeting that definition.
Kubey says she sees most of her clients hit the taxation amount of Social Security with just the addition of a small pension or a little investment income. They tend to take that in stride but are typically more concerned about staying below the IRMAA thresholds.
“They say, we have to do whatever we can to avoid it,” she says.
Typically, the only way to get around those thresholds is by lowering your modified adjusted gross income for the year. One way to do this is with a sizable charitable donation, which you can make directly from a qualified retirement plan that is subject to required minimum distributions. A qualified charitable distribution could reduce your yearly income by up to $100,000, depending on how much you give.
A strategy of Roth conversions to reduce the amount you have to take in required minimum distributions each year could also help, but you have to make sure to avoid high income in the two years before you enroll in Medicare.
“If you’re retiring and now you’re going to be in the 10% bracket but haven’t started drawing down money yet, this might be a good time to do some conversion,” says Ryan Losi, a CPA and executive vice president at Piascik.
One pro tip from Kubey is to use the taxation of Social Security to your advantage and elect the highest withholding you can. “A lot of folks who have had trouble making estimated tax payments, once they start collecting Social Security, it’s like a withholding pot,” says Kubey. “Take the max 22%, and it really helps. In some cases, it eliminates the need for estimated tax payments or brings down the amount greatly.”
