We're only about a month away from the 2025 Social Security cost-of-living adjustment (COLA) announcement. Many seniors feel that recent COLAs haven't helped their checks keep pace with inflation like they're supposed to, and next year's COLA probably won't do anything to change that. We don't know what it'll be yet, but current projections put it lower than the 3.2% bump recipients got last year.
That's not the only troubling thing about next year's COLA, though. An often overlooked Social Security rule could force some seniors to give some of their checks back to the government. Here's how to know if it'll affect you.
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Social Security benefit taxes are costing more seniors every year
Social Security has three sources of funding. The most important is the payroll taxes workers pay on their annual incomes. There's also interest earned on money in Social Security's trust funds. The third source is a tax on certain Social Security beneficiaries whose income exceeds specific thresholds.
This last one has become increasingly problematic for seniors. To determine who's eligible for the tax, the government looks at your provisional income. This is defined as your adjusted gross income (AGI), plus any nontaxable interest you have, and half your annual Social Security benefit. For example, if you get $24,000 from Social Security annually and have a $50,000 AGI and no taxable interest, your provisional income would be $62,000.
Provisional incomes over certain amounts for your marital status could result in a Social Security benefit tax, as the table below shows:
|
Marital Status |
0% of Benefits Taxable if Provisional Income Is Under: |
Up to 50% of Benefits Taxable if Provisional Income Is Between: |
Up to 85% of Benefits Taxable if Provisional Income Exceeds: |
|---|---|---|---|
|
Single |
$25,000 |
$25,000 and $34,000 |
$34,000 |
|
Married |
$32,000 |
$32,000 and $44,000 |
$44,000 |
Data source: Social Security Administration.
Interestingly, the thresholds for benefit taxation haven't changed in decades. As a result, more and more seniors find themselves owing these taxes as their benefits increase due to COLAs. Those who already pay these taxes routinely may owe more in future years than they do right now. This leaves them with less money they can put toward their own living expenses.
But it's not as bad as it might seem at first. You won't actually lose 50% or 85% of your benefits. Instead, this is the amount of your benefits you could pay ordinary income tax on. So, for example, if your provisional income falls into the 85% taxable range and you're in the 22% tax bracket, then you could pay 22% tax on up to 85% of your benefits. It's still not great, but it's better than losing the majority of your checks to the IRS.
How you can prepare
Seniors worried about owing Social Security benefit taxes may be able to reduce their risk by limiting the amount of taxable retirement account withdrawals they make. These increase your AGI and, in turn, your provisional income. Relying more upon Roth retirement savings, if you have them, won't affect your AGI because these withdrawals are generally tax-free.
Avoiding Social Security benefit taxes isn't always possible, though. If you expect to owe them, the next best thing you can do is to plan for them. You could work with a tax professional to estimate how much you might owe and set that money aside to cover your tax liability. Or you could contact the Social Security Administration and request that it withhold money from your benefit checks for taxes.
You may also want to check to see if you could owe state Social Security benefit taxes. Currently, nine states tax the benefits of some of their seniors, though this number has been dropping. Even in states that have these taxes, they're typically restricted to high earners.
It's best to keep this information in mind even if you don't currently owe Social Security benefit taxes. You could face them in a few years as COLAs continue to drive up your benefit, and knowing this in advance will help you prepare.
