All the way back in September of 2022, Congress and the IRS released inflation numbers used to determine important items such as Income Tax Brackets, Social Security COLAs (Cost-of-Living Adjustments), and various other items affecting virtually all Americans. At that time, I was upset that the entity charged with calculating the annual rate of inflation, the U.S. Department of Labor (DOL), again did not apply their calculation equally among affected areas of the economy. That would require applying a single inflation rate to all aspects of the U. S. Tax Code.
Not only has it not been applied across-the-board, but it keeps getting worse.
Perhaps the most noteworthy inflation number is the COLA applied to Social Security Benefits. This year’s 8.7% increase was welcome news to over 66 million people currently receiving benefits, as well as those preparing to file. Assuming the increase was reflective of the actual increase in our daily cost of living, to maintain an individual’s standard of living, tax brackets should be indexed identically to the Benefits increase. This did not happen.
Income Tax Brackets for 2023 were only increased by about 7%, leaving Social Security recipients with a tax increase amounting to a tax on the 1.7% difference between COLA Benefit increases and new tax brackets. Worse yet, the number of Social Security recipients that are subjected to income tax on those benefits increased. This phenomenon is a result of income-based means testing for taxing Social Security Benefits.
For decades now, taxpayers with an annual MAGI (Modified Adjusted Gross Income) exceeding $44,000 (Married filing jointly) are taxed on 85% of monthly Social Security Benefits. Had that $44,000 threshold been inflation-adjusted annually since the law was passed, the MAGI trigger would be more than $93,000 today, exempting millions of taxpayers from owing the additional tax.
Many other items in the Tax Code do not receive an annual inflation adjustment, and there are other provisions that adjust only every few years, as inflated price levels compound. As a result of these factors, thousands of Social Security Benefit recipients pay incrementally more income tax every year on additional Benefits resulting from inflation.
In our opinion, Social Security Benefits should be 100% tax-free, like the System was originally designed, and taxpayers were originally promised. However, if we are forced to pay tax on benefits, at least it should reflect inflation.
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