Americans on Social Security May Owe IRS Thousands

Leading up to tax season, millions of Americans might owe the IRS thousands on their Social Security payments.

While Social Security payments saw a cost of living adjustment (COLA) of 3.2 percent this year, there could be unintended consequences on many seniors' tax returns.

If their incomes are boosted too high, it could put them in a different tax bracket and see a larger amount of money taken out.

Nationally, about 40 percent of people receiving Social Security must pay income taxes on their benefits.

The two key variables on if you do, however, are your filing status and combined income.

If you have substantial income in addition to your benefits, including wages, earnings from self-employment, interest, dividends and other taxable income that must be reported on your tax return, expect to fork over a significant amount to the IRS.

Those with an income between $25,000 and $34,000 may have to pay income tax on up to 50 percent of their benefits. But once you hit an income more than $34,000, up to 85 percent of your benefits may be taxable.

Plus, all married couples with a combined income between $32,000 and $44,000 will see up to 50 percent of benefits taxed. Meanwhile, for couples with more than $44,000, up to 85 percent of your benefits may be taxable.

Beyond the federal government, many states tax Social Security income as well, but the rules vary. Typically, age and income will have the final say in what you pay.

In Connecticut, for instance, all Social Security recipients who have an adjusted gross income below $75,000 (or $100,000 for married joint filers) don't get taxed. But if you have an income higher than that, 25 percent of the benefits will be taxed.

This is similar to New Mexico, where everyone filing individually with incomes below $100,000, as well as married couples earning less than $150,000, are exempt from the tax.

Other states have rules regardless of income, but they can get a little tricky.

In Rhode Island, single filers with an income of $101,000 or less, as well as joint filers making less than $126,250, don't have to pay taxes on Social Security, generally. However, everyone who is younger than what Social Security considers full retirement age will have to take out taxes from their benefits.

And the tax year can make a difference as well. Nebraska exempts 60 percent of Social Security benefits for the tax year 2023. But in 2024, there won't be any taxes on your benefits.

In 2024, only 10 states continue to tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia.

That means for many seniors, the state they choose to live in can have a significant impact on their finances.

"Seniors need to be aware of these rules before filing taxes, as it can significantly impact their financial planning," Zack Hellman, the owner of Tax Prep Tech, told Newsweek.

"For those living in states that tax Social Security benefits, understanding the specific thresholds and rates is crucial to accurately estimate their tax liabilities. These state-level taxes can affect their overall income and potentially their quality of life, especially for those who rely heavily on Social Security for their retirement income."

In January, seniors receive a Form SSA-1099 that will show the total benefits you received last year as well as the total amount you need to report on your federal return.