Will you have to pay more taxes on Social Security benefits because of the COLA increase?

Next month the Social Security Administration (SSA) will confirm the annual cost-of-living adjustment (COLA) increase for 2023. Each year the amount on offer is increased on a proportional basis for all recipients, to account for the year-on-year increase in prices.

The increase will be vitally important for beneficiaries in 2023 after high inflation eroded consumer’s purchasing power throughout 2022. In recent months the annualised rate of inflation has exceeded 8%, a huge year-on-year increase.

But while the COLA increase will be eagerly anticipated, what will the repercussions be for taxation?

Recipients of Social Security must pay tax if there annual income is more than $25,000 for an individual, or $32,000 for a couple who file jointly. Beyond those thresholds you will have to pay federal income tax on you Social Security entitlement, but not on the whole amount.

Individuals earning between $25,000 and $34,000 can be taxed on up to 50% of their benefits; while those earning more than $34,000 can have up to 85% of their benefits taxed.

For those filing jointly, 50% of earnings between $32,000 and $44,000 will be taxed. If a couple earns more than $44,000 then up to 85% of the benefits will be taxable.

So yes, the COLA increase could leave you needing to pay more taxes, but only if your income is above those thresholds.

How much will the 2023 COLA increase be?

After a period of sustained high inflation the upcoming COLA adjustment for 2023 is expected to be the largest for decades. Last year the SSA offered an increase of 5.9% but that was quickly outpaced by the rate of inflation, leaving Social Security recipients out of pocket.

Earlier this week the SSA confirmed that the inflation rate for August was 8.3%, a slight drop on the figure of 8.5% recorded in July. These are two of the three months (along with September) used to calculate the COLA boost.

Assuming that there is no sudden drop-off in the September figure, the Senior Citizens League (SCL) have estimated a COLA increase for 2023 of 8.7%. This would provide the average Social Security recipient with an extra $144 in their monthly payment, a considerable amount for beneficiaries.

A statement from the SCL reads: “Without a COLA that adequately keeps pace with inflation, Social Security benefits purchase less and less over time, and that can create hardships especially as older Americans live longer lives in retirement.”