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A record 8.7% cost-of-living adjustment helped Social Security beneficiaries stave off the effects of inflation in 2023.
But as they file their federal returns this tax season, they may be surprised to find more of their benefit income has been taxed.
Capitol Hill lawmakers on both sides of the aisle have put forth proposals to eliminate those levies on benefit income altogether.
Rep. Angie Craig of Minnesota, who is championing a bill with fellow Democrats, calls the idea a “win-win.”
“It’s a tax cut for seniors and a way to ensure more Americans can depend on the Social Security benefits they’ve earned,” Craig said in a statement.
But experts say eliminating taxes on Social Security benefit income may be a tough ask as the program faces a funding shortfall.
COLAs go up, but tax thresholds stay the same
The 8.7% cost-of-living adjustment, or COLA, for 2023 — prompted by record high inflation — was the biggest annual increase in four decades. The Social Security Administration estimated it would put an extra $140 per month on average in beneficiaries’ monthly checks.
The year before — 2022 — the cost-of-living adjustment was 5.9%.
Both increases were substantially higher than the 2.6% average annual increase to benefits over the past 20 years due to record high increases in prices.
As inflation has started to subside, a 3.2% cost-of-living adjustment for 2024 has come closer to that average.
But even as recent annual adjustments spiked, the thresholds at which Social Security benefits are taxed have stayed the same.
Up to 85% of Social Security benefit income may be taxed.
The levies are applied to combined income, or the sum of half your benefits and total adjusted gross income and nontaxable interest.
If your combined income as an individual tax filer is between $25,000 and $34,000 — or between $32,000 and $44,000 if married and filing jointly — you may pay taxes on up to 50% of your benefits.
If your combined income is more than $34,000 and you file individually — or if you’re married and file jointly and have more than $44,000 in combined income — up to 85% of your benefits may be taxed.
More may owe taxes on Social Security income
This year, some Social Security beneficiaries may see their benefits taxed for the first time, according to the Senior Citizens League. A 2023 survey from the nonpartisan senior group found 23% of respondents who had been receiving Social Security for three or more years paid taxes on their benefits for the first time that year.
That share may increase this tax season following the 8.7% cost-of-living increase in 2023, according to the group.
But just how much more beneficiaries will pay in taxes due to the “unusually large COLA” for 2023 depends on their personal circumstances, said Tim Steffen, a certified financial planner and the director of advanced planning at Baird.
“Whenever income is up, it’s reasonable to expect your tax liability to be as well, although that really depends on other income and deductions [you] might have between last year and this year, too,” Steffen said.
Over time, because Social Security’s combined income thresholds don’t change, more beneficiaries can expect to pay taxes on the money from their monthly checks.
“At a certain point in the future, essentially everyone will be paying taxes on their Social Security benefits,” said Emerson Sprick, associate director of economic policy at the Bipartisan Policy Center.
Proposals aim to eliminate ‘double tax’
Some lawmakers have decried a so-called “double tax” that those levies on benefits impose after beneficiaries paid into the system through payroll taxes.
“This is simply a way for Congress to obtain more revenue for the federal government at the expense of seniors who have already paid into Social Security,” Rep. Thomas Massie, R-Ky., who is sponsoring the Republican bill, said in a statement.
While both sides of the aisle have proposals to eliminate taxes on Social Security benefits, they differ on how to pay for it.
Craig’s proposal — called the You Earned It, You Keep It Act — would pay for the change with transfers from Treasury general funds and applying the Social Security payroll taxes to earnings over $250,000. Currently in 2024, the first $168,600 in employee wages is subject to the Social Security payroll tax.
The bill, which has seven Democratic co-sponsors, would help increase Social Security’s ability to make benefit payments on time and in full by 20 years, according to an analysis by the program’s chief actuary.
Massie’s proposal — called the Senior Citizens Tax Elimination Act — would pay for the cost of eliminating taxes on benefits through government fund transfers outside of the Social Security trust funds. The proposal, with 30 Republican co-sponsors, would not include any tax increases.
Not a ‘high probability of legislative success’
The idea of nixing taxes on Social Security benefits will likely be popular with the retirees who pay them. More than half of seniors — 58% — said the income thresholds for taxes on Social Security benefits should be updated to today’s dollars, according to a Senior Citizens League survey conducted last year.
But it may be tougher to get the change passed by lawmakers.
“They’re really popular messaging bills,” Sprick said. “But that doesn’t translate to a high probability of legislative success.”
Authorizing general fund transfers to shore up Social Security is “deeply unpopular” in Congress, Sprick said.
Social Security’s tax policies are already progressive, with just around 40% of beneficiaries owing levies on their benefit income, he noted.
Because of that, other changes to help the bottom 60% who do not owe taxes — such as providing higher income replacement for lower earners or a guaranteed level of minimum benefits — may better help those retirees, Sprick suggested.
Investing in dividend stocks can create a nice stream of passive income. Instead of receiving payouts as cash, you can also use dividends to increase your holdings by reinvesting them to purchase additional shares of stock. Among other benefits, reinvesting dividends can help you avoid brokerage fees. However, even when you don’t receive dividends as cash payouts and reinvest them in additional shares, you still must pay taxes on them. For personalized tax planning assistance, work with a financial advisor.
Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
What Is Dividend Reinvestment?
When you reinvest dividends paid by some shares and exchange-traded funds, you use the dividends to buy more shares of stock instead of receiving the dividends as cash payouts. For example, say you own 100 shares of Stock ABC and it pays a $1 quarterly dividend. You could have that $100 dividend deposited as cash into your brokerage account. Or you could choose to use the dividend to purchase $100 worth of additional shares of Stock ABC.
Reinvesting dividends can represent a savvy investment strategy. As one benefit, it taps the power of compounding. The reinvested dividends buy you additional shares and if the share price increases over time, your portfolio value grows. In addition, if Stock ABC pays an increasing dividend each year, reinvesting those rising dividends can further augment your wealth.
Many investors set up their portfolios so that dividends get automatically reinvested. This also brings into play the beneficial effects of dollar-cost averaging, which can reduce the average cost you pay for shares. As yet another benefit, purchasing shares via dividend reinvestment can also avoid brokerage commissions and fees. Not surprisingly, given these benefits, many investors employ strategies that call for reinvesting dividends.
How Reinvested Dividends Are Taxed
Investors who reinvest dividends have to keep some special considerations in mind when it comes to taxes. The IRS considers any dividends you receive as taxable income, whether you reinvest them or not. When you reinvest dividends, for tax purposes you are essentially receiving the dividend and then using it to purchase more shares. So even though the dividend doesn’t pass through your hands in cash form, it’s still considered taxable income.
However, dividends may not get taxed like regular income. For tax purposes, dividends fall into two categories – qualified and non-qualified. Each category gets taxed differently. Qualified dividends have to meet IRS holding period requirements. They get taxed at the lower long-term capital gains rates. Non-qualified dividends, also called ordinary dividends, get taxed as ordinary income. That generally means paying a bigger tax bite.
Reporting Reinvested Dividends
You must report both qualified and non-qualified reinvested dividends on your tax return. To help you accurately report these amounts, your brokerage will send you Form 1099-DIV. This tax form details your dividend income for the year and breaks it down between ordinary dividends, qualified dividends and capital gains distributions.
When the time to prepare your tax return arrives, take the dividend amounts from your 1099-DIV and enter them on your Form 1040. Report qualified reinvested dividends on line 3a. Enter amounts for non-qualified reinvested dividends on line 3b. If you have more than $1,500 in ordinary dividends, you must also complete Schedule B and attach it to your Form 1040.
Avoid Taxes with Retirement Accounts
While you can’t avoid taxes on reinvested dividends completely, a way exists to keep from having to pay taxes on reinvested dividends the year you receive them. To do this, simply hold the dividend-paying securities in a tax-deferred retirement account such as a 401(k) or IRA.
Contributions to these accounts may be tax-deductible, so your dividend reinvestments escape taxation at the time you make them. After that, your money grows tax-free over time. You do pay taxes on the reinvested dividends and earnings later when you withdraw funds in retirement. But in the meantime, you can reinvest dividends tax-free.
Bottom Line
While reinvesting dividends can help grow your portfolio, you generally still owe taxes on reinvested dividends each year. Reinvested dividends may be treated in different ways, however. Qualified dividends get taxed as capital gains, while non-qualified dividends get taxed as ordinary income. You can avoid paying taxes on reinvested dividends in the year you earn them by holding dividend stocks in a tax-deferred retirement plan.
Tips for Investing
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Consult a financial advisor if you need help determining the taxes owed on reinvested dividends. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/Sean Anthony Eddy, ©iStock.com/Wengen Ling, ©iStock.com/megaflopp
The post Do You Pay Taxes on Dividends Reinvested? appeared first on SmartReads by SmartAsset.
The Internal Revenue Service is going after hedge funds, large law firms, partnerships and more millionaires as its compliance clampdown continues, the tax agency’s commissioner said.
One year after Congress approved billions in extra funding for the IRS to improve operations and revive high-end tax enforcement that flagged during the past decade, the agency is now getting specific about where it’s planning to make sure it’s collecting all taxes due.
The IRS is also refining its methods for spotting enforcement targets: by using artificial intelligence, in certain cases.
The IRS has its eyes on approximately 1,600 millionaires who owe at least $250,000 apiece in tax debt. All together, they owe “hundreds of millions of dollars,” Werfel said. The agency said in July that it’s already collected $38 million in back taxes from 175 millionaire taxpayers.
“These are sweeping and historic changes that will alter the landscape of our compliance work,” IRS Commissioner Danny Werfel told reporters Thursday evening.
“‘These are sweeping and historic changes that will alter the landscape of our compliance work.’”
Audit rates by the increasingly short-staffed and cash-strapped IRS have been dropping in recent years for all income levels, but particularly for extremely rich taxpayers.
There’s a range of estimates on the gap between taxes owed and actually paid. In 2021, Werfel’s predecessor Charles Rettig said it could be as large as $1 trillion each year because the tax agency didn’t have the resources to dig into many complex returns.
The IRS’s latest announcement is the agency’s latest attempt to narrow that gap.
There will also be a fresh batch of audits for 75 large partnerships, Werfel said. These entities include hedge funds, real-estate investment partnerships, publicly-traded partnerships and large law firms.
The organizations – each averaging $10 billion in assets – will be told of the audits in the coming weeks, Werfel said.
These types of audits are complicated, and even after examination an audit can result in no change for the tax bill. IRS officials are betting these reviews will reap extra tax revenue after using artificial intelligence to spot suspicious patterns and trends.
“IRS will renew efforts to audit hedge funds, real-estate investment partnerships, publicly-traded partnerships and large law firms.”
The IRS doesn’t know how much it could collect from these partnerships and the process could be lengthy and litigious, Werfel said. “But we absolutely believe this is the right thing to do to make sure there is tax fairness,” he said.
Starting next month, the IRS will also mail out letters to around 500 partnerships that are worth at least $10 million. The IRS has questions about their balance sheets and if the agency isn’t satisfied with answers, more audits may follow.
The IRS is also stepping up scrutiny for taxpayers with cryptocurrency holdings and foreign bank accounts, Werfel said.
The Inflation Reduction Act, which was enacted in August 2022, included $80 billion to upgrade staffing and raise the number of audits for businesses and rich taxpayers. The money will not be used to increase enforcement on households making under $400,000, Biden administration officials said.
In wrangling to raise the debt ceiling earlier this year, the White House agreed with Republican negotiators to redirect $20 billion of that $80 billion.
Friday’s enforcement announcements are concrete next steps for an agency that’s eager to show how it’s planning to use the money to upgrade — especially as negotiations continue over its annual base budget.
The audits require staff with the skills to sift through complex returns. But the IRS still has a long way to go to have the people ready for the task, a recent watchdog report showed.
The agency’s Large Business and International Division had a net loss of 82 revenue agents during fiscal year 2023, when 97 departing agents exceeded 15 new hires, according to a report from the Treasury Inspector General for Tax Administration.
In the agency’s Small Business/Self-Employed Division, there was a net loss of 186 revenue agents, the report said this week.
The IRS aims to get back to a 90,000 full-time-employee headcount, which it hasn’t been at in more than a decade, Werfel noted.
The first hiring burst included 5,000 customer-service assistants, and extra audit staff is the next step, Werfel said. Meanwhile, he said the agency is also shifting staff to higher-end audits while the hiring effort continues.
“We have more work to do in hiring exam personnel. On that front, it’s going to be a very busy fall for us,” he said.
If you’ve used Google’s search engine and clicked on a link at any time between October 2006 and September 2013, you may be eligible for a small portion—roughly $7.70—of a $23 million settlement with the tech giant.
Key Takeaways
- If you’ve used Google’s search engine between October 2006 and September 2013, you could be eligible for a small payout.
- You could receive up to $7.70 of a $23 million settlement as part of a class-action lawsuit against the tech giant.
- You have until July 31 to file a claim, exclude yourself from the settlement, or object to the settlement.
The settlement stems from a class-action lawsuit filed against Google (GOOG, GOOGL) a decade ago accusing the company of “storing and intentionally, systematically, and repeatedly divulging its users’ search queries and histories to third parties via ‘Referrer Headers’.” The practice impacts billions of searches conducted by millions of consumers worldwide.
Am I Eligible?
You may be eligible for a payout if you used Google Search at any time between October 25, 2006 and September 30, 2013.
What’s the Payout?
While the estimated payout is $7.70, this could change depending on the number of people who file a valid claim.
How Can I File a Claim?
To file a claim, head to and click on “Submit Claim” in the right-hand section. Applicants must submit their full name, street address, and email address. On the website, you can find additional documents outlining important dates and deadlines for submitting a claim.
Among your legal rights, you also have the option of excluding yourself from the settlement if you wish to be part of any other lawsuit against Google, or you can object to the settlement altogether by writing to the court.
When Can I File?
Applications to file a claim are now open and can be submitted through July 31. No claims can be filed after this deadline. The deadline for excluding yourself from claims or objecting to the settlement is also set for July 31.
When Do I Get Paid?
As of right now, it isn’t clear when payments will be distributed. A court will decide whether to approve the settlement in a hearing set for Oct. 12. Even if the court approves the settlement, appeals can slow the disbursal process, according to a claims notice.