You’ve probably heard that inflation is on the rise. And even if you haven’t seen the scary headlines, you’ve certainly noticed that the costs of groceries, gas, heating and many other household necessities have risen.
When you’re retired, this inflation can hit you hard, because chances are you live on a fixed income. While Social Security benefits were: up 5.9% this yearHowever, that major cost of living (COLA) adjustment on its own may not be enough to maintain your standard of living amid rising prices. As a result, you may be forced to increase the amount you withdraw in savings.
If you increase your income in 2022 to help you maintain purchasing power during this time of high inflation, there is one risk you should be aware of that could affect the amount of Social Security income you take home. .
How Higher Family Income May Affect Social Security Benefits
When your household income rises, bringing in this extra cash can have financial implications when it comes to your Social Security Checks. There’s a simple reason for this: Once your income rises enough, you risk facing more taxes on Social Security benefits.
Benefits are not taxed at all with income up to a certain threshold, but up to 85% of your benefits can be subject to federal taxation once your income reaches a certain level. There are also 13 states that tax benefits social security but usually make an exception for lower earners.
If you take more money out of your accounts in 2022 because the prices of the goods and services you buy have risen, your income is more likely to exceed the limit at which some of your benefits become taxable. And if you already paid tax on some benefits, a higher family income could mean you should be taxed on more benefits.
How Much Can Your Income Be Without Paying Social Security Taxes?
The big question to ask yourself when your family income rises is: When are your Social Security benefits taxed?
When it comes to federal taxes, only some income counts. The Social Security Administration looks at “provisional” income, which is half of your Social Security checks, all taxable income, and some non-taxable income. If your provisional income exceeds certain limits, here are the tax rules you will have to deal with:
- Single taxpayers with provisional incomes between $25,000 and $34,000 are subject to tax on up to 50% of the distributions.
- Single tax applicants with provisional income in excess of $34,000 are subject to tax on up to 85% of the distributions.
- Married joint filers with incomes between $32,000 and $44,000 owe taxes on up to 50% of the distributions.
- Married joint filers with incomes over $44,000 are subject to tax on up to 85% of the distributions.
The thresholds at which distributions are partially taxed are not subject to adjustment every year due to wage growth and inflation. That means that while you may need to increase your income this year to maintain purchasing power, the IRS won’t take that into account when determining whether your benefits will be taxed.
Make sure you understand these federal rules as well as those within your own state so you can prepare for what new taxes you may owe if you’re forced to increase household income this year.