Approximately 70 million recipients of Social Security will see a sizable jump in their monthly benefits in 2023. In fact, the 8.7% cost of living adjustment (COLA) for next year is the most significant Social Security increase in over 40 years. (In 1981, the COLA was 11.2%.) This increase will include Social Security monthly benefits, SSI payments, and survivor benefits. All in all, the recipient will see an average of $140 per month beginning in January.
To put this into perspective, the COLA typically increases by 1-3% most years. In 2022, the COLA increase was 5.9%, one of the biggest raises in recent history. So why is this increase for 2023 so large? Inflation.
The yearly COLA amount is determined by the swings in the Consumer Price Index (CPI), which calculates the inflation rate in the United States. In turn, the COLA helps offset those inflation costs for Social Security recipients. But, while that probably sounds like nothing but good news to those struggling to make ends meet as inflation continues to soar, the additional money doesn’t consider how much Uncle Sam will receive back in taxes.
Social Security was first subject to taxes in 1983. Today, up to 85% of your benefits may be taxed if you are a single filer with more than $25,000 in annual income (for married filers, the income threshold is $32,000). Is it possible for the COLA increase to push you into a higher tax bracket? The simple answer is yes, it’s possible. Below is a detailed explanation of how your Social Security may be taxed:
- Income of less than $25,000: 0% taxed
- Income of $25,000 to $34,000: Up to 50% taxed
- Income of more than $34,000: Up to 85% taxed
Spouses filing jointly:
- Income of less than $32,000: 0% taxed
- Income of $32,000 to $44,000: Up to 50% taxed
- Income of more than $44,000: Up to 85% taxed (1)
The general rule of thumb is that a large increase affects your overall income. While that may initially seem like a positive impact for all Social Security recipients, low-income households may lose access to certain savings programs or receive less aid. On the flip side, higher-income families may pay more for Medicare benefits. For more information from the Social Security Administration about the 2023 COLA, click HERE.
If you’re a Social Security recipient, you may be asking, what happens next? For starters, in December, you should receive a COLA notice. If you don’t want to wait that long, you can also log into your online Social Security account and read about it in the message center. If you have questions about how the Social Security monthly increase may impact your situation, contact the advisors of Osiwala Financial Group. You can request your 20-minute “Ask Anything” session via phone, in-office, or by clicking HERE. During this complimentary, no-obligation appointment, you’ll be able to ask your questions to advisors who know the answers and can educate you on the next steps to take to help protect your retirement.