Millions of Americans will receive a little extra Social Security money soon, but advisers warn it may also mean a little extra taxes.
The Social Security Fairness Act eliminates the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO), which reduce Social Security benefits for about 3.2 million public-sector retirees who also receive pension income. The law’s effective date is retroactive to January 2024, so beneficiaries may get a one-time retroactive payment that could amount to thousands of dollars and higher monthly benefits starting this year.
“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.
That’s a lot of money to spend, but for some, it can also be enough of an income boost to trigger more taxes, experts said.
“The good news is, this isn’t urgent, and people have time to prepare,” said Jaime Eckels, certified financial planner and Wealth Management Partner with Plante Moran Financial Advisors.
People have about a year before the tax man cometh.
“They may be taxed, but not until 2025 taxes” because income is recorded when cash is received, said Mark Kohler, certified public accountant and author of several tax and small business guides, who is based in Irvine, California.
“You should have gotten (the money) last year but didn’t get it until now, so it’s reflected on the SSA-1099 for 2025,” he said.
The SSA sends people form SSA-1099, or a Social Security Benefit Statement, detailing the amount of benefits you received in a tax year.
The average monthly Social Security benefit will increase from $1,927 to $1,976 in 2025 after the cost-of-living adjustment this year, according to the Social Security Administration.
How much of people’s Social Security benefits will get taxed depends on the total amount of their income, including tax-exempt interest like from a municipal bond, plus one-half of their Social Security benefits for the taxable year.
Up to 85% of your Social Security benefits can be taxed depending on how much more that combined income is over than the base amount for your filing status.
The base amounts based on filing status are:
$25,000 if you’re single, head of household, or qualifying surviving spouse
$25,000 if you’re married filing separately and lived apart from your spouse for the entire year
$32,000 if you’re married filing jointly
$0 if you’re married filing separately and lived with your spouse at any time during the tax year.
If you’re married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring the taxable portion of your benefits. Even if your spouse didn’t receive any benefits, you must add your spouse’s income to yours when figuring on a joint return if any of your benefits are taxable.
SSA provides a tool to help calculate whether Social Security benefits are taxable and if so, how much.
Aside from the higher share of taxable Social Security benefits, beneficiaries will also have to watch their overall income tax bracket, Eckels said. “The payments could also push individuals into a higher tax bracket or IRMMA bracket, affecting Medicare premiums,” she said.
IRMAA stands for Income-Related Monthly Adjustment Amount, which is a surcharge added to Medicare Part B and Part D premiums for people with higher incomes.
People have a few options they can try to avoid more taxes. They include, experts say:
If the lump-sum retroactive payment pushes your combined income above the thresholds for the tax on Social Security, the IRS will allow you to allocate it to the year you should have received it, Eckles said. You don’t have to “amend” your prior year’s tax returns either. Instead, you check the box on line 6c of your Form 1040 or 1040-SR if it lowers the taxable portion of your benefits and pay any taxes owed for the prior year with your current year’s tax return.
Consider making qualified charitable distributions (QCDs) from your IRAs if you’re subject to required minimum distributions (RMD). “QCDs used to offset your RMDs are an above-the-line deduction that will reduce modified adjusted gross income,” or MAGI, Eckles said. MAGI is also used to determine Medicare Part B and D premiums, she noted.
Reduce withdrawals from retirement accounts since you’ve got higher Social Security payments and/or harvest tax losses in brokerage accounts to manage taxable income.
Invest your retroactive Social Security check into your own small business, Kohler said. “There’s no effective or sustainable and wise tax deduction to offset your Social Security payment,” he said. Not only can you generate more income for yourself and your next of kin, but “a small business allows you to take more effective tax write-offs.”
What about that trip you’ve always wanted to take to Tahiti? That’s not completely off the table, Kohler said. In that case, he said, use some, not all, of the money to “go get that itch scratched.”
He suggested carving out 20-25% of the money for fun, a new tv or travel and 25% to pay down high-interest debt if you have it. Divide the rest of it between a Roth IRA and a new idea or business that will pay you in the future.
People deposit after-tax money into Roth IRAs, but withdrawals are tax free and not subject to RMDs.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at [email protected] and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday.
This article originally appeared on USA TODAY: Many Americans may get a Social Security boost. And maybe a tax bill.
