A growing number of seniors have to give the IRS a cut of their retirement benefits each year. Find out why that’s the case.
In 2025, more retirees are going to have to give the IRS a cut of their retirement benefits.
While this is likely to be a huge disappointment for seniors who rely on Social Security to make ends meet, there’s nothing most retirees can do to stop the change that’s coming.
Here’s why a growing number of retirees are going to have an IRS bill to pay on their Social Security next year.
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There’s a simple reason why more seniors are going to be taxed on Social Security
Taxes are going to become an issue for more retirees because of the rules that determine when benefits become taxable.
Retirees do not have to pay taxes on benefits until their provisional income equals $25,000 for single tax filers or $32,000 for married filers. Once provisional income goes above this limit, retirees could owe taxes on up to 50% of benefits. And for those with even higher incomes — $34,000 for single filers and $44,000 for married joint filers — up to 85% of benefits could be taxed.
Provisional income isn’t all income — it’s half of all Social Security benefits plus all taxable and some non-taxable income. Still, a growing number of retirees are going to hit these thresholds in 2025 and owe taxes on the benefits they have coming in.
That’s going to happen because the threshold at which benefits become taxable does not change but benefits do increase most years.
COLAs protect against rising costs, but tax thresholds aren’t indexed to inflation
The big problem with Social Security’s tax rules is that they are not indexed to inflation. They have not been increased since taxes were first imposed on benefits decades ago — even as most other aspects of Social Security automatically adjust each year to account for the fact that wages and costs increase over time.
In 2025, for example, seniors are getting a 2.5% cost-of-living adjustment (COLA) because a consumer price index used to calculate COLAs shows that there was a year-over-year price increase. With seniors getting 2.5% more benefits, their incomes will increase and more people will be over the income limit at which they begin to owe the IRS money on their Social Security payments.
This has been an ongoing problem for years. In fact, the Senior Citizens League reports that while fewer than 10% of retirees had to pay taxes on benefits when those taxes were first put into place, there’s been a dramatic increase in this number. Now, around half of all Social Security retirees must pay a tax on their benefits that was intended to hit only high earners.
When the COLA is applied to your benefits and they increase because of it, you should find out if your provisional income will exceed the thresholds at which benefits become taxable even if that hasn’t been the case in the past.
If you discover that you’ll have taxes to pay next year thanks to the benefits bump you got, it’s important that you make plans to ensure you’re paying those taxes on time to avoid problems with the IRS.