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Standard Deduction for seniors over 65 in 2023: how much will it be with IRS increase?

The SSA announced a record cost-of-living increase for 2023, but the average beneficiary won’t be able to deduct the whole amount when filing taxes.

Seniors get standard deduction increase less than COLA increase to benefits

Social Security recipients will be receiving a notice from the Social Security Administration during the month of December to inform them of the cost-of-living adjustment (COLA) increase to their benefits in 2023. The average retired worker will see a monthly benefits payment of $1,827 an increase of $146. That will translate into an extra $1,752 over the course of next year.

Unfortunately, the IRS doesn’t use the same inflation figures to calculate their adjustment to income thresholds, standard deductions and credit amounts. Most taxpayers over 65 will only be able to take an additional $1,500 through the standard deduction when they file 2023 tax returns in 2024. Not to mention those increased benefits could get taxed at a higher rate.

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Why the standard deduction for seniors is less than SSA COLA increase

The Social Security Administration uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to calculate the annual COLA. However, under the Tax Cuts and Jobs Act of 2017 (TCJA), the IRS now uses the Chained Consumer Price Index (C-CPI) to index tax provisions. The latter is generally outpaced by the former with the IRS annual adjustment coming in at nearly 7 percent versus the COLA increase of 8.7 percent for 2023.

Standard deductions in 2023

The standard deduction increases in 2023 will be as follows, $13,850 for single filer or married but filing separately, $20,800 for head of households and $27,700 for married taxpayers filing jointly.

An additional standard deduction of $1,500 will apply to those who are either 65 and older or blind, and the amount doubles if both apply to a taxpayer in 2023. The amount for those that are unmarried and not a surviving spouse will be $1,850 in 2023.

Dependents that can be claimed on another person’s tax return for the 2023 fiscal year are limited to a standard deduction of either $1,250 or your earned income plus $400, whichever is greater. However, the total can’t exceed the basic standard deduction for your filing status.

Filing status20222023
Single filers & Married couples filing separately$12,950$13,850
Married couples filing jointly & surviving spouses$25,900$27,700
Head of Household$19,400$20,800

How are Social Security payments taxed?

The tax rate for Social Security benefits varies based on a number of factors aside from just age; and the household income of recipients is the main deciding factor in taxation. Those thresholds are also dependent on the filing status of Social Security recipients.

Individuals with a Total Gross Income, including Social Security, of more than $25,000 will be taxed on up to 50 percent of their Social Security income. Couples who file jointly will begin being taxed when their total income exceeds $32,000.

Individuals earning more than $34,000, or couples with a combined gross income of at least $44,000, will be taxed on up to 85 percent of their Social Security benefits.

These amounts are not indexed to inflation which means, over time, more and more recipients have had to pay taxes on Social Security benefits. Typically it is only retirees, who have very little household income aside from their Social Security entitlement, who could be exempt from any form of taxation on the payments.

How is the Social Security tax rate calculated?

The rate of taxation levied on Social Security payments is similar to that of other forms of income. Filers must submit their adjusted gross income, which combines their salary, Social Security benefits and all other sources of taxable income.

If that total exceeds the minimum threshold then at least 50 percent of your Social Security benefits will be considered taxable income and will be treated as such. The proportion of your total Social Security entitlement that is based on several factors, as mentioned above.