How Benefits Are Taxed
Social Security benefits were not taxable for the first few decades of the program’s existence. But in 1983, up to 50 percent of benefits became taxable for single taxpayers whose “combined income”—also known as provisional income—was higher than $25,000 annually and for joint filers earning more than $32,000. Congress added another level of taxation in 1993, when up to 85 percent of Social Security benefits became taxable for single taxpayers earning more than $34,000 and joint filers earning more than $44,000.More than 30 years later, those income levels and taxation amounts remain the same. “Since this isn’t adjusted for inflation each year, the portion of beneficiaries who are subject to the tax is increasing,” says Garrett Watson, director of policy analysis at the Tax Foundation. In 1984, fewer than 10 percent of Social Security beneficiaries had to pay taxes on their benefits; now, about half do.
Tips to Reduce Your Tax Bill
Because Social Security benefits can still be taxable under current law, be strategic with your income if you’re close to the cutoff. Roger Young, thought leadership director for T. Rowe Price, recommends estimating your combined income midyear to see whether you can make some moves to stay below the income limits.For example, withdrawing money from Roth IRAs and Roth 401(k)s rather than traditional, tax-deferred IRAs and 401(k)s can help reduce your combined income. Eligible distributions from health savings accounts don’t count in the calculations, either. You can withdraw money tax-free from an health savings account (HSA) for out-of-pocket medical expenses, and after you turn 65, you can even use the money to pay premiums for Medicare Part B (and Part A, if you have to pay for it), Part D and Medicare Advantage plans.
Adjustments to income from Schedule 1 of your 1040 can also reduce your combined income, says Mark Luscombe, principal analyst with Wolters Kluwer Tax and Accounting. For example, if you’re still working, you may be able to deduct contributions to traditional IRAs and self-employed retirement plans, as well as the cost of self-employed health benefits. You can deduct HSA contributions if you have an eligible high-deductible health insurance policy and haven’t enrolled in Medicare. If you’re still paying student loans, that interest may also be deductible.
Avoid a Tax Surprise
Taxes are not automatically withheld from Social Security benefits, so you should make a plan to pay them if you expect part of your benefits to be taxable. To have taxes withheld from your benefits, you can submit Form W-4V (Voluntary Withholding Request) and specify the 7 percent, 10 percent, 12 percent, or 22 percent level. For more information, see the Social Security Administration’s page on requests to withhold taxes at www.ssa.gov/manage-benefits/request-withhold-taxes.Alternatively, you can pay quarterly estimated taxes to the IRS or have extra taxes withheld from other income, such as a pension or a salary if you’re still working. You could also ask your IRA or 401(k) administrator to withhold extra money for taxes when you take withdrawals.
Tim Steffen, director of advanced planning for Baird in Milwaukee, says most of Baird’s clients opt to have taxes withheld from IRA distributions or to make quarterly payments. As you weigh your options, gauge the likelihood that you’ll stay on top of quarterly payments. “If you’re not good at that, withholding is simple, and you never see the money—it goes away right away,” he says.
Another advantage of withholding, especially from taxable IRA withdrawals, is that you can hang on to the money longer without a potential underpayment penalty. You’re supposed to pay taxes on your income as it’s earned through the year, but the rules are different for withholding, especially for IRA distributions. In that case, the government assumes that taxes were withheld evenly throughout the year, even if it was all done in December, says Steffen.
You can ask your IRA administrator to withhold whatever percentage you want from your IRA, he says. For example, if you’re subject to required minimum distributions, you could have most of the RMD withheld to cover your other taxes.
If you received retroactive Social Security benefits in a lump sum after the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) provisions were eliminated by the Social Security Fairness Act (passed in January 2025), you need to be especially careful with taxes in 2025. The WEP previously reduced Social Security benefits for people who received pensions based on work that was exempt from Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare. The GPO reduced Social Security benefits for spouses and surviving spouses who received a pension based on work that was exempt from FICA taxes. These retirees’ benefits are no longer reduced, and they received a lump sum (generally by March 2025) for the extra benefits owed since January 2024.
Beneficiaries will need to report those extra benefits when they file their 2025 income tax return, but they may have the option to pay taxes on the 2024 portion based on their 2024 tax rates. To do this, check box 6c for the lump-sum election method on the 2025 Form 1040. Luscombe recommends looking at your income and tax rates in 2024 and comparing them to your 2025 income and tax rates when deciding which option is better for you.
