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Social Security recipients will enjoy a 2.8 percent increase in their benefits — the largest in seven years — in 2019. But for some recipients, this latest annual increase could end up costing them benefits.
Retirees who do not currently pay federal income taxes on their Social Security benefits may owe taxes due to the increase, which is technically known as a cost-of-living adjustment, or COLA. Retirees who already pay taxes on their benefits may owe more taxes due to the COLA.
It depends on how the COLA impacts what the Social Security Administration calls your “combined income,” a figure that reflects multiple sources of retirement income.
How Social Security benefits are taxed
The extent to which your Social Security benefits are taxable is based on your combined income. This figure comprises:
- Your adjusted gross income
- Any nontaxable interest
- One-half of your Social Security benefits
In other words, if you add up those three amounts, you will have your combined income.
According to the Social Security Administration, you may owe taxes on up to 50 percent of your Social Security benefits if:
- You file a federal tax return as an individual and your combined income is between $25,000 and $34,000.
- You file a joint return and your combined income is between $32,000 and $44,000.
You may owe taxes on up to 85 percent of your Social Security benefits if:
- You file an individual return and your combined income is more than $34,000.
- You file a joint return and your combined income is more than $44,000.
According to a national survey released by the nonprofit Senior Citizens League earlier this year, about 56 percent of all Social Security households pay taxes on part of their benefits.
How to minimize taxes on your Social Security benefits
Retirees who can reduce their combined income can lower the rate at which Uncle Sam taxes their Social Security benefits — or avoid taxation of their benefits entirely.
This could be as simple as withdrawing slightly less money from taxable investment accounts next year to compensate for the 2.8 percent increase in your Social Security benefits. We detail several other methods in “5 Ways to Avoid Paying Taxes on Your Social Security Benefits.”
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