Millions of Americans will soon see an increase in their Social Security payments. However, financial experts warn that this extra money might also mean a higher tax bill.
This increase comes from the Social Security Fairness Act, which removes benefit reductions for 3.2 million retirees. Some may get a lump sum plus higher monthly checks, but taxes could rise.
Why Are Social Security Payments Increasing?
A new law, the Social Security Fairness Act, removes two rules—the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO)—that previously reduced benefits for about 3.2 million retirees who also receive a pension. Since the law is retroactive to January 2024, some people may receive a one-time lump sum along with higher monthly payments for the rest of the year.
According to the Social Security Administration (SSA), some beneficiaries may see only a small increase, while others could receive more than $1,000 extra per month.
While this is good news for many, it could also push some recipients into a higher tax bracket, increasing their tax burden for next year.
When Will Taxes Apply?
The extra income won’t be taxed until 2025, since the IRS taxes income based on the year it is received. If you get a retroactive lump-sum payment, it will show up on your SSA-1099 form for the 2025 tax year. That means you’ll report it when filing your 2025 taxes in early 2026.
How Much Tax Will You Pay?
Whether your Social Security benefits are taxed depends on your total income. This includes things like:
- Wages from work
- Pension payments
- Interest from savings and investments
- Half of your Social Security benefits
If your total combined income exceeds a certain amount, a portion of your benefits may become taxable. Up to 85% of your benefits could be subject to tax based on the following income limits:
| Filing Status | Income Limit | Taxable Portion of Social Security |
| Single, Head of Household, or Qualifying Widow(er) | $25,000 | Up to 50% taxable |
| Married, Filing Separately (lived apart from spouse) | $25,000 | Up to 50% taxable |
| Married, Filing Jointly | $32,000 | Up to 50% taxable |
| Married, Filing Separately (lived with spouse) | $0 | Up to 85% taxable |
If your combined income exceeds these limits, a larger portion of your benefits may be taxed.
Additionally, a higher income may affect your Medicare premiums by pushing you into a higher Income-Related Monthly Adjustment Amount (IRMAA) bracket.
How to Reduce Your Tax Burden
There are a few ways to reduce the impact of these taxes:
- Spread Out Your Lump-Sum Payment: If your retroactive payment pushes you above the taxable limit, the IRS allows you to allocate it to the year it was originally due. This could lower your overall tax bill.
- Make Qualified Charitable Distributions (QCDs): If you are 72 or older and taking Required Minimum Distributions (RMDs) from an IRA, you can donate up to $100,000 per year to charity, which reduces your taxable income.
- Reduce Withdrawals from Retirement Accounts: If possible, take out less money from your 401(k) or IRA to keep your income below the taxable Social Security threshold.
- Harvest Tax Losses: If you own stocks, you can sell underperforming investments to offset taxable income.
- Start a Small Business: Investing in a small business could provide tax deductions while creating additional income for the future.
- Smart Spending: If you receive a lump-sum payment, consider using it wisely. Experts recommend:
- Using 20-25% for fun (like travel or a new TV)
- Paying off high-interest debt
- Investing in a Roth IRA for tax-free growth
- Funding a side business for additional income opportunities
FAQs
1. Will all Social Security beneficiaries see a payment increase?
No, only those affected by the elimination of the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) will see an increase.
2. When will I have to pay taxes on my increased Social Security benefits?
Taxes on the extra benefits won’t be due until you file your 2025 tax return in early 2026.
3. How can I find out if my Social Security benefits will be taxed?
The SSA provides an online calculator to determine whether your benefits are taxable. You can also check your SSA-1099 form for total benefits received.
4. Can I avoid taxes on my lump-sum Social Security payment?
Yes. The IRS allows you to allocate the payment to the year it was originally due, which could reduce your tax liability.
5. Will the Social Security increase affect my Medicare costs?
Possibly. If your income increases enough, you may enter a higher IRMAA bracket, leading to higher Medicare Part B and Part D premiums.