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Why Social Security COLAs Can Increase Your Taxes

Inflation bumps up benefit payments — but not the income thresholds that make them taxable

spinner image Social Security benefits could be taxed due to COLA increases
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The recent inflation spike had a silver lining for Social Security recipients —the largest cost-of-living adjustments (COLAs) for benefits in more than 40 years.

But come tax time, a growing number of retirees are finding that silver lining has a black cloud: Those bigger benefits push them over the income threshold at which the IRS taxes a portion of Social Security payments.

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In a recent survey of Social Security recipients by the Senior Citizens League, an advocacy group, nearly a quarter of those who had been getting benefits for at least three years said they paid taxes on those benefits for the first time in 2023.

That likely reflects 2022’s 5.9 percent COLA, then the largest in about 40 years, which increased the average retiree’s Social Security income by about $1,100 for the year. An even bigger COLA in 2023 — 8.7 percent, boosting the average annual retirement benefit by about $1,750 — means more older filers can expect a tax bite on their benefits.

“We expect the higher Social Security income will not only cause more Social Security recipients to pay taxes on their benefits this tax season, but taxes are taking a bigger portion of Social Security checks in 2024,” says Mary Johnson, Social Security and Medicare policy analyst for the Senior Citizens League.

More people pay each year

With inflation cooling, benefits are getting a more modest boost this year — 3.2 percent — but the recent big COLAs cast a bright light on a dynamic that has been in play for decades.

The federal government began taxing Social Security income in 1984, one of a broad array of changes enacted the year before to shore up the program’s finances. The tax revenue goes into Social Security’s trust funds, helping to cover future benefit payments.

But while benefits have increased most years with inflation, the income levels at which they become taxable have stayed the same.

“Those cutoff limits for paying taxes are not updated each year when prices increase, as your benefits are,” explains Anqi Chen, a senior research economist at the Center for Retirement Research at Boston College. “That puts more people into the category of having to pay taxes on the benefits.”

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Since 2016, the share of Social Security recipients paying taxes on benefit income has inched up from 41 percent to 48 percent, according to Social Security Administration (SSA) data. Over the same period, the amount of taxes they’ve paid has increased by nearly half, from $32.8 billion in 2016 to $48.6 billion in 2022.


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The determining factor is what the IRS calls “combined” or “provisional” income: adjusted gross income (as figured on your 1040 form), plus tax-free interest (for example, from investments in state or municipal bonds), plus half of your Social Security payments.

If that sum exceeds $25,000 for an individual taxpayer or $32,000 for a married couple filing jointly, they may owe taxes on up to 50 percent of their benefit income. Above $34,000 for a single filer or $44,000 for a couple, up to 85 percent of benefits can be taxed. (The IRS has an online tool you can use to calculate exactly how much of your Social Security income is taxable.)

It’s unlikely you’ll owe taxes on your benefits if that's your only income. But if you have other sources of money, such as work, a pension or withdrawals from savings, you might find yourself over the line. That leaves some beneficiaries “very surprised and shocked,” says Laurie Smith, a tax partner at Wiss & Company, a New Jersey-based accounting firm.

“We have clients that stay a little bit more in tune to tax law, but in general, most taxpayers are unaware that a significant amount of their benefits are taxable,” let alone that annual COLAs can increase that likelihood, Smith says.

Part of the plan

Had they been linked to inflation when Congress established them 40 years ago, the minimum income levels for taxing benefits would now be around $75,000 for a single filer and $96,000 for a couple. But setting the thresholds as fixed dollar amounts unaffected by inflation was part of Congress’ plan from the start, according to SSA research on the history and effect of taxing benefits.

Lawmakers set the rules so that Social Security income would be taxed less heavily than other forms of retirement income, like pensions, but intended for the gap to narrow over time as more and more people crossed the income threshold and owed taxes on their benefits.

“It’s important to keep that in mind when you are planning for resources in retirement — that taxes do exist, and a larger share of people will end up paying some taxes on their Social Security benefits,” Chen says. “Regardless of whether we think it’s fair or not, for planning purposes, that’s a component.”

That means accounting for the tax implications of your prospective retirement income.

“Many focus on creating income that will meet their spending needs. However, with that income comes taxes,” says Colleen Carcone, director of wealth planning strategies at TIAA. “While you may not be able to control the Social Security portion of the equation, you can certainly take steps to reduce AGI [adjusted gross income] and investment income.”

For example, “one thing we work with our clients on is looking at converting their IRAs to Roth IRAs,” Smith says. Because contributions to Roth accounts are taxed going in, the money you take out in retirement is not treated as taxable income.

Here are a few other ways accountants and advisers suggest to reduce or avoid taxes on Social Security benefits by way of lowering your overall taxable income.

Contribute to a retirement account. Until April 15, people age 50 and older can put up to $7,500 into an IRA and deduct it from their 2023 taxes. “So, even though we are already in calendar year 2024, there is still time to make an impact on your 2023 tax bill,” Carcone says. For 2024 taxes, the contribution limit for 50-plus savers goes up to $8,000.

Donate to charity. If you are over age 70½, you can transfer up to $100,000 directly from an IRA to the charity (or charities) of your choice and the withdrawal will not count as taxable income. 

Spread out work income. If a client who owes taxes on benefits also does consulting or other work, “we talk to them about spreading out that income,” Smith says. “Maybe not receiving all of it in one year but taking a smaller amount of income over a longer period of time.”

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