The tax landscape for retirees in the United States will undergo a major change in 2025, with potential financial complications, and you will see what this new question that many are asking is about.
When a growing number of older people will be forced to pay taxes on the benefits they receive from Social Security, they will see impacts on their income and higher tax burdens. This adjustment, although predictable, could represent an unpleasant surprise for those who mainly depend on this income to cover their basic needs.
Tax thresholds for retirees: what changes in 2025?
For several years now, tax laws have established a threshold at which retirees must pay taxes on their Social Security benefits. By 2025, more seniors will meet these thresholds and, as a result, will face a tax liability to the Internal Revenue Service (IRS).
The reasons behind this change are not directly related to a change in regulations, but rather to a particularity of the tax system and the automatic adjustments that apply to Social Security benefits.
Tax rules without adjustment for inflation
The key factor explaining this increase in retirees who will have to pay taxes is the lack of adjustment in income thresholds since the regulations were implemented decades ago. While Social Security benefits increase annually to the cost of living adjustment (COLA), the income limit that determines when taxes must be paid on these benefits has not changed since its creation. This means that as retirees’ incomes increase due to cost-of-living adjustments, more of them exceed the tax thresholds.
For single filers, the provisional income limit is $25,000, while for married filers it is $32,000. Once these thresholds are exceeded, up to 50% of Social Security benefits may be subject to tax. Additionally, if provisional income reaches $34,000 for singles or $44,000 for marrieds, the percentage of taxable benefits can increase to 85%.
Cost of living adjustment (COLA) and its tax consequences for retirees and Social Security beneficiaries
The annual cost-of-living adjustment applied to retiree benefits is a mechanism that seeks to compensate for increased prices on essential goods and services. By 2025, this adjustment is expected to be 2.5%, allowing retirees to receive an increase in their Social Security payments. However, this increase will also carry the risk that more seniors will exceed established income thresholds and, as a consequence, will have to pay taxes on a greater portion of their benefits.
The failure to index tax thresholds to rising cost of living has been an ongoing problem. When taxes on Social Security benefits were introduced, less than 10% of retirees were affected. Today, that number has increased significantly, and about half of all retirees face a tax liability on the benefits they receive. This change has drawn criticism, as the taxes were originally intended for high-income earners, but now affect a much broader group of retirees.
Tips for retirees who will face new taxes: what you need to know to be prepared
For those retirees who, due to the cost of living adjustment, will find that their provisional income exceeds the thresholds in 2025, it is crucial that they adequately prepare to meet their tax obligations. Planning ahead can avoid issues with the IRS and ensure that taxes are paid on time, thus avoiding potential penalties.
This scenario poses an additional challenge for retirees who already rely on Social Security income to cover their everyday expenses. Although cost-of-living adjustments are designed to protect seniors from the impact of inflation, the fact that more retirees must pay taxes on their benefits could reduce the positive impact of these adjustments.
