Social Security imposes taxes on benefits for individuals who earn above a certain income, a threshold that has remained unchanged for decades.
Numerous changes are anticipated for Social Security in 2025. Retirees will receive a cost-of-living adjustment, and those below full retirement age will be permitted to earn additional income from work without losing benefits. Individuals with higher earnings will be subjected to Social Security taxes on a slightly larger portion of their income, and earning a work credit to qualify for Social Security will require a greater income as well.
These modifications are inherently integrated into Social Security and occur automatically. This is due to the fact that prices and wages continue to rise over time, and failing to accommodate such changes could impede the program’s effectiveness. For example, if benefits had remained constant over 30 years while inflation increased prices, Social Security would not function as intended.
However, one aspect that will not change in 2025, despite some advocating for it, is the imposition of taxes on Social Security benefits for certain retirees.
While numerous elements of Social Security automatically adjust every year in response to inflation, the tax rules affecting Social Security benefits have remained unchanged since their inception decades ago.
Social Security benefits were not subject to taxation until 1983, when amendments aimed at stabilizing the program allowed up to 50% of benefits to be taxed for individuals with provisional incomes of $25,000 for single filers and $32,000 for married joint filers. Provisional income includes half of Social Security benefits plus all taxable and certain non-taxable income.
Subsequently, in 1993, an additional tax tier was introduced. 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.
Initially, less than 10% of households were affected by this tax obligation. However, the Senior Citizens League reports that currently, about half of all households are taxed on benefits, and this number is expected to continue rising.
Given the increasing number of retirees subject to taxes on benefits, there is a strong argument that the income thresholds at which benefits become taxable should be adjusted for inflation, similar to most other aspects of Social Security benefits.
With benefits and work limits adjusted for inflation, it stands to reason that the thresholds for taxable benefits should also rise. However, lawmakers have not enacted such a measure, possibly indicating an intention to increase the number of households paying taxes to bolster Social Security funding. The program faces a trust fund shortfall in the foreseeable decades and taxes on benefits contribute revenue that mitigates financial issues.
In light of Social Security’s existing financial challenges, lawmakers are unlikely to implement changes that would reduce tax obligations on benefits. Consequently, the thresholds established in the 1980s and 1990s are expected to remain unchanged.
Regrettably, this persists in resulting in a growing number of retirees losing portions of their benefits, which are already insufficient for basic living expenses. As changes appear unlikely in the near future, seniors should be cognizant of these IRS obligations and plan accordingly to ensure their financial security.
