A little increase in Social Security benefits is on the horizon for millions of Americans, but advisors caution that it might also result in a small increase in taxes.
The Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), which lower Social Security benefits for over 3.2 million public-sector retirees who also receive pension income, are eliminated by the Social Security Fairness Act. Because the bill goes into effect retroactively to January 2024, beneficiaries may get greater monthly benefits beginning this year as well as a one-time retroactive payment that might total thousands of dollars.
“Some people’s benefits will increase very little while others may be eligible for over $1,000 more each month,” the Social Security Administration said in January.
Although it’s a significant amount of money to spend, experts cautioned that for certain people, it may also be enough of an increase in income to result in higher taxes.
According to Jaime Eckels, a certified financial planner and Wealth Management Partner of Plante Moran Financial Advisors, “the good news is that people have time to prepare and this isn’t urgent.”
When is the tax payment deadline?
Before the tax man arrives, they have around a year.
According to Mark Kohler, a certified public accountant and Phoenix, Arizona-based author of multiple tax and small company publications, “they may be taxed, but not until 2025 taxes” because income is recorded at the time cash is received.
“It’s reflected on the SSA-1099 for 2025 because you should have received (the money) last year but didn’t until now,” he said.
The amount of benefits you got during a tax year is detailed in the Social Security Benefit Statement, or form SSA-1099, which is sent by the SSA.
What is the potential tax liability?
The total amount of a person’s income, including tax-exempt interest from municipal bonds and half of their Social Security payments for the taxable year, determines how much of their benefits will be taxed.
Depending on how much your total income exceeds the basic amount for your filing status, you may be taxed up to 85% of your Social Security benefits.
According to filing status, the base amounts are:
$25k if you are the primary breadwinner, head of the home, or an eligible surviving spouse.
If you are married and filing separately, you must have lived apart from your spouse for the entire year. If you are married and filing jointly, you must pay $32,000.
$0 if you lived with your spouse at any point during the tax year and are married and filing separately.
When calculating the taxable component of your Social Security benefits, you and your spouse must combine your incomes and benefits if you are married and file a joint return. If any of your benefits are taxable, you must include your spouse’s income in your calculations on a joint return, even if they did not receive any benefits.
To determine if and how much Social Security benefits are taxed, the SSA offers a calculator.
According to Eckels, claimants will also need to monitor their overall income tax bracket in addition to the increased portion of taxable Social Security benefits. “The payments could also push individuals into a higher tax bracket or IRMMA bracket, affecting Medicare premiums,” she said.
Medicare Part B and Part D premiums for individuals with higher earnings are subject to an additional fee known as the Income-Related Monthly Adjustment Amount, or IRMAA.
What steps may people take to lower their Social Security bump taxes?
There are a few ways that people can try to avoid paying additional taxes. According to specialists, they consist of:
- According to Eckels, the IRS will let you to apply the lump-sum retroactive payment to the year you should have received it if it raises your combined income beyond the Social Security tax levels. Additionally, you are not required to “amend” your tax returns from the previous year. Instead, you pay any taxes due for the previous year with your current year’s tax return and tick the box on line 6c of your Form 1040 or 1040-SR if it reduces the taxable component of your benefits.
- If you must make required minimum distributions (RMD) from your IRAs, you may want to consider making qualified charitable distributions (QCDs). According to Eckels, “QCDs used to offset your RMDs are an above-the-line deduction that will reduce modified adjusted gross income,” or MAGI. She added that Medicare Part B and D premiums are also based on MAGI.
- As your Social Security benefits have increased, you should take fewer withdrawals from retirement accounts and/or collect tax losses in brokerage accounts to control your taxable income.
- “Invest in your own small business with your retroactive Social Security check,” Kohler said. “Your Social Security payment cannot be offset by any sensible, sustainable, or effective tax deduction,” he stated. You and your family members can earn more money, and “a small business allows you to take more effective tax write-offs.”
What about your long-held dream of visiting Tahiti? Kohler stated that it’s not entirely out of the question. If so, he advised using some of the funds—not all of them—to “go get that itch scratched.”
He advised setting aside 20–25% of the funds for leisure, a new television, or vacation, and using the remaining 25% to settle any high-interest debt you may have. The remainder should be split between a Roth IRA and a new venture or business that will generate income for you down the road.
Roth IRAs allow after-tax contributions, but withdrawals are tax-free and exempt from RMDs.
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