Retirement Alert – An Old Social Security Rule May Affect More Americans in 2025

Millions of older Americans depend on Social Security to meet their financial needs in retirement, and for many, it’s their primary or even sole income source. While some beneficiaries enjoy tax-free Social Security benefits, others find themselves having to pay taxes due to a long-standing rule. In 2025, more retirees may face these taxes due to a cost-of-living adjustment (COLA) that will bump up their Social Security income just enough to trigger tax obligations.

Let’s cut into why more retirees could face Social Security taxes in 2025 and what can be done to reduce the tax burden.

Retirees

In 2025, Social Security beneficiaries will see a 2.5% COLA, intended to help retirees keep up with rising living costs. Although this adjustment isn’t the highest seen in recent years, it will still place additional income in many retirees’ hands. This increase, however, could lead to a tax burden for some beneficiaries, as the Social Security tax thresholds remain unchanged and relatively low.

Taxation Thresholds

Whether Social Security benefits are taxed depends on a retiree’s combined income. This figure is calculated by adding:

• Adjusted gross income (AGI)
• Nontaxable interest (such as from municipal bonds)
• 50% of Social Security benefits

For example, consider a retiree with an AGI of $22,000, $2,000 in municipal bond interest, and $24,000 in annual Social Security benefits. This retiree’s combined income would be $36,000. Under current rules:

• Single filers with a combined income between $25,000 and $34,000 may be taxed on up to 50% of their benefits. Above $34,000, taxes apply to up to 85% of benefits.
• Married couples filing jointly are taxed up to 50% on benefits if their combined income is between $32,000 and $44,000. Beyond $44,000, taxes may apply to up to 85% of benefits.

The thresholds were set decades ago, and with the COLA increase, many more retirees might find their Social Security income edging over the taxable limit, even though the cost-of-living adjustment is relatively modest.

How to Potentially Reduce

There are ways for retirees to lower their combined income, potentially reducing or even avoiding Social Security taxes.

Roth 401(k)

Shifting retirement savings into a Roth IRA or Roth 401(k) could be an effective strategy. Roth withdrawals aren’t considered taxable income in retirement, which helps keep combined income lower. In the earlier example, if a retiree’s only earnings besides Social Security come from tax-free Roth withdrawals, their combined income would stay well below the tax thresholds, potentially eliminating any tax on their Social Security benefits.

For example, with $2,000 in municipal bond interest and $24,000 in Social Security benefits, a retiree’s combined income would be $14,000. At this level, they would likely avoid Social Security taxes entirely, while a combined income of $36,000 could trigger taxes on up to 85% of benefits for single filers.

Changes

There is hope that lawmakers may eventually raise the income thresholds to adjust for inflation, allowing more seniors to receive their benefits tax-free. However, any adjustments are unlikely in the near future, and seniors should plan on managing their combined income levels under current rules.

Social Security Income

Beyond tax management, retirees can also take steps to maximize their Social Security benefits. For example, delaying benefits until age 70 increases the monthly payout and total lifetime benefits. Strategic filing decisions, spousal benefits, and the timing of withdrawals from other retirement accounts can further enhance income from Social Security. Even small adjustments in claiming strategies can boost retirement income substantially.

Taking steps to stay below the taxable income threshold can save you a significant amount over the years and ensure you’re keeping more of your hard-earned benefits.

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