COLA 2024: Every year, millions of Americans anxiously await the announcement of the Social Security Cost-of-Living Adjustment (COLA).
This annual adjustment is intended to maintain retirees’ standard of living by keeping their incomes in accordance with inflation. Despite the fact that this increase is typically favourable for retirees, it is important to consider how it may affect your income taxes in the coming year.
The 2024 Social Security COLA is anticipated to be one of the largest in recent memory. The precise percentage increase will not be determined until later in the year, but preliminary estimates indicate that it could be as high as 6%.
Beneficiaries will receive a substantial increase in their monthly payments to keep up with escalating costs of living.
Negative aspect of the COLA increase
On the other hand, this substantial COLA increase could force some retirees into a higher income tax bracket. If your total income exceeds a certain threshold, your Social Security benefits are taxable at the federal level. The greater your income, the greater portion of your Social Security benefits will be taxable.
When combined with other sources of income such as pensions, investments, or part-time employment, the COLA increase could potentially drive you into a higher tax bracket. This could result in a greater proportion of your Social Security benefits being taxable, thereby reducing your total income after taxes.
How to schedule with COLA
To avoid disagreeable tax season surprises, it is essential to plan ahead. Consider consulting a tax professional or utilising tax planning software to estimate your tax liability based on your anticipated income, including COLA-adjusted Social Security benefits.
Additionally, investigate strategies to minimise your tax liability, such as spacing out withdrawals from retirement accounts, utilising tax credits and deductions, and contemplating tax-efficient investment options.
While the Social Security cost-of-living adjustment (COLA) for 2024 is excellent news for retirees, it is crucial to be aware of its potential impact on your income tax liability.
You can maximise your increased benefits while minimising any additional tax burdens by planning ahead and making informed financial decisions.
