Social Security serves as an essential source of income for millions of retired Americans today. But unfortunately, even people who depend heavily on those benefits don't necessarily get to keep them in full.
That's because the federal government has the right to tax Social Security. And there's a good chance more Americans will find themselves paying taxes on Social Security in 2025 for this reason.
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It's a matter of outdated rules
It's not true that all retirees pay taxes on their Social Security benefits. Rather, whether those taxes apply depends on combined income, which is measured as the sum of:
- Adjusted gross income
- Non-taxable interest income (like what municipal bonds pay)
- 50% of annual Social Security income
But once combined income exceeds $25,000 for single tax-filers or $32,000 for married couples filing taxes jointly, taxes on Social Security can apply. And the reason more retirees will likely owe those taxes in 2025 is that through the years, Social Security benefits have gotten an automatic cost-of-living adjustment, or COLA.
The purpose of Social Security COLAs is to help ensure that seniors don't lose out on buying power as inflation keeps driving the cost of living up. As a result, the average monthly Social Security benefit is a lot larger today than it was several decades ago.
But the last time any adjustment was made to combined income thresholds and the rules of Social Security taxes was 1993. Benefits are considerably larger now than they were in the early 1990s. And because Social Security income itself is factored into combined income, it stands to reason that more seniors will owe taxes on those benefits this year.
The only way to make the situation fair would be to adjust the combined income thresholds for inflation the same way benefits have been adjusted for inflation through the years. But lawmakers don't seem to be in a rush to do that. And the reason for it may be simple.
Lawmakers' goal may be for all or most retirees to eventually have to pay taxes on their Social Security income. Social Security gets most of its funding from payroll taxes, but it also gets a portion of its funding from taxes on benefits.
If the combined income thresholds were to be adjusted, fewer seniors would have to pay taxes on Social Security. But that would strip the program of critical revenue it needs to stay afloat.
Will the rules change?
As part of his presidential campaign, President Trump pledged to work on eliminating taxes on Social Security. But the problem there is that denying the program that revenue could push Social Security closer to insolvency and speed up the timeline for potential benefit cuts.
It's unclear as to whether Trump's proposed change will gain enough lawmaker support to become official. But what we could see is a potential adjustment to the combined income thresholds -- one that would only have higher-income seniors paying taxes on the Social Security benefits they receive.
Or, maybe lawmakers won't make that change, either. It clearly has not been in a priority in the past 30 years or so. But as President Trump draws more attention to the issue of taxes on benefits, we could see some changes at least start to get talked about.
