Millions of retirees depend on Social Security to cover essential living expenses. However, depending on Social Security might trigger a surprising tax from the IRS in 2025. Always a contentious subject, Social Security taxes are not assessed benefit payouts at the same rate as traditional income. However, the parameters set decades ago to determine if Social Security benefits are taxed are well outdated. More seniors will likely be caught off guard when filing their taxes in 2025.
The Boundary That Stayed It Still
The surprise here is, the income parameters which determine whether benefits are taxed are set at $25,000 for individuals and $32,000 for couples. These figures have not changed since 1984. Unlike many tax code provisions that are adjusted with inflation, these do not budge. Coupled with the rising cost-of-living adjustments which enhance annual benefits, many retirees are unwittingly squeezed into the taxable zone.
Cost of Living Adjustments (COLA) Help… and Hurt
Retirees received a COLA relief in 2024. While a welcomed development, increased benefits and triggered tax liability. Experts worry about 2025 when retirees discover filing federal tax from benefits for the first time.
How Much Could Retirees Pay?
Social Security benefits are subject to taxation based on income levels. As a result, as much as 85% of a retiree’s Social Security benefit can be taxed. For someone managing withdrawals from retirement savings, a pension, light part-time employment, and Social Security, the net income may be much lower than anticipated. For worse, some retirees are subject to a secondary taxation “tax torpedo,” wherein each additional dollar of income increases the benefit to within the taxable range.
Can Relief Be Expected?
For advocates, the major focus has been the necessity to implement a cost of living adjustment to the thresholds. There are many proposals, but none of them succeeded in gaining visibility within the political sphere. With elections around the corner, addressing this hidden burden taxation goes the least prioritized on the to-do list.
What Retirees Should Do Now
Financial planners have been proactive in urging retirees to start planning post 2020. Projection tools from IRS and the Social Security Administration can aid in determining level of benefits to be projected.
