Although Social Security has been around for decades, the program tends to undergo different changes from one year to the next. And 2024 is no exception.
In 2024, seniors on Social Security will see their benefits rise 3.2%, thanks to a much-needed cost-of-living adjustment (COLA). Meanwhile, seniors who are working and collecting benefits at the same time will also be subject to a higher earnings-test limit this year, giving people in that boat more leeway to earn money from a job without having their Social Security impacted.
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These are just a couple of the changes that are hitting Social Security in 2024. But one of the program's long-standing rules is not set to change this year. And that's apt to be a source of frustration for many beneficiaries.
It doesn't take much to get taxed on Social Security
Many seniors are shocked to learn that their Social Security income is taxable at the federal level. And those taxes are based on provisional income. Also known as combined income, provisional income is the total of seniors' adjusted gross income, non-taxable interest, and 50% of their annual Social Security benefit.
Once that number reaches $25,000 for single tax filers, taxes on Social Security can apply. The same holds true for married couples filing jointly with a provisional or combined income of $32,000 or more.
The problem, though, is that these thresholds are (clearly) not very high. Not only that, but these thresholds were established decades ago. The original limits for provisional income were set in 1983, with an adjustment to the initial rules in 1993.
All told, we're talking about events that happened decades ago. And a lot has changed since the 1980s and 1990s. Inflation has driven living costs up in a very notable way -- yet the thresholds for provisional income haven't risen to reflect a rise in everyday expenses.
Given that Social Security benefits are subject to an annual COLA, it makes little sense that the provisional income thresholds wouldn't adjust annually, too. But unfortunately, that's just not how the system works.
A good way to avoid having benefits taxed
The typical senior would no doubt prefer to not have their Social Security income taxed. And one way to avoid that is to save for retirement in a Roth IRA, since withdrawals from these accounts don't count toward provisional income.
Those with savings in a traditional IRA can consider a Roth IRA conversion, though there could be serious tax implications involved. However, the benefit of doing a conversion is not only avoiding taxes on retirement plan withdrawals, but also potentially getting to keep more Social Security income.
Of course, in time, lawmakers may agree to adjust the thresholds for provisional income and spare more seniors from having their benefits taxed (or at least taxed to the same degree as today). But for now, this isn't a change that anyone collecting Social Security can anticipate. As such, a large number of seniors may end up losing a portion of their benefits to taxes in 2024.
