Many changes are happening to Social Security in 2025. Retirees are getting a cost-of-living adjustment and those who are under full retirement age are allowed to earn a little more money from work without losing benefits. Higher earners will also pay Social Security taxes on a little more of their income, while earning a work credit to help them qualify for Social Security is also going to require them to make a little bit more money.
All of these changes are built into Social Security and happen automatically. And with good reason: Prices and wages increase over time, and if you don't account for that, Social Security would stop working correctly. Imagine, for example, if benefits stayed the same for 30 years even as inflation drove prices up.
There's one thing that won't change in 2025, though, even though some think it should. It has to do with taxes charged on Social Security benefits for some retirees.
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These tax rules don't change and a growing number of retirees lose money because of it
Although so many aspects of Social Security change automatically each year in response to inflation, the rules that impose taxes on Social Security benefits have not changed since they were first put into place decades ago.
Social Security benefits were not taxable at all until 1983 when amendments to shore up the program made up to 50% of benefits taxable for those with provisional incomes of $25,000 for single tax filers and $32,000 for married joint filers. Provisional income is half of Social Security benefits plus all taxable and some non-taxable income.
Then, in 1993, another tax tier was added. At that time, up to 85% of benefits became taxable for single filers with $34,000 in provisional income and $44,000 for married joint filers.
At the time when taxes were originally charged on benefits, fewer than 10% of households were hit by this new obligation. Now, according to the Senior Citizens League, around half of all households are -- and that number is only going to increase over time.
Should this tax rule change?
With a growing number of retirees getting stuck paying taxes on benefits, there's a solid argument to be made that the thresholds at which benefits become taxable should be indexed to inflation just like most other aspects of Social Security benefits are.
After all, if benefits increase and work limits increase to account for inflation, shouldn't the threshold at which benefits become taxable also go up?
Of course lawmakers didn't put that into the law, so it's possible that they wanted an increasing number of households to owe taxes to provide more funding for Social Security. Social Security is already facing a trust fund shortfall in the coming decades, and without taxes on benefits bringing in revenue, the program's financial troubles would only be made worse.
Lawmakers now are unlikely to make changes that make fewer benefits taxable in light of the fact Social Security has money problems already, so it's likely those thresholds put in place in the 1980s and 1990s are going to remain unchanged for another year.
Unfortunately, though, this means more and more retirees each year will lose some of their benefits, which already aren't enough to live on. Since that's probably not changing anytime soon, seniors need to be aware of these IRS obligations and plan accordingly when preparing for their financial future.
