Social Security: 2025 COLA Increase and Managing Taxes on Benefits

Key Takeaways

Social Security makes up a big chunk of retirees’ income. For Social Security beneficiaries age 65 and older, 37% of men and 42% of women get at least half of their income from Social Security, according to the Social Security Administration.¹

This is why determining the best time to start receiving benefits, as well as having smart investing and tax planning strategies, can be so important.

How Are Social Security Benefits and COLA Changing in 2025?

Social Security cost-of-living adjustments (COLAs) are annual increases in benefits to account for inflation. Without COLAs, retirees increasingly lose buying power each year and may struggle to balance their budgets on a fixed income in the face of inflation and other rising costs. These adjustments help offset inflation year over year so that retired Americans can still afford day-to-day expenses.

The 2025 COLA for Social Security benefits  will increase by 2.5%. This is compared to a 3.2% increase in 2024 and a record 8.7% increase in 2023. Most Social Security beneficiaries will notice this change starting with their January 2025 payments.

Will You Pay Taxes on Social Security Benefits?

Income from Social Security benefits could be taxable, depending on your overall income. The COLA increases for Social Security and Supplemental Security Income recipients may also lead to additional income taxes for the year.

Many retirees may not know that their Social Security benefits can be taxable—and they might end up owing income taxes they didn’t plan for.

No one likes a surprise tax bill during tax season. And with inflation eating away at purchasing power, it’s even more important for retirees to contain the tax cost.

Calculating ‘Provisional Income’ and Social Security Taxes

Social Security benefits are considered to be a tax-efficient retirement income source compared to retirement plans, and it’s important to understand the tax impact to be prepared for it.

Single federal tax filers with $25,000 or more in provisional income and married couples filing jointly with $32,000 or more may have up to 85% of their total Social Security benefits subject to income taxes.

If your provisional income reaches the IRS income threshold, the amount of Social Security subject to taxes will depend on your annual income and tax status.

For individual tax filers:

• If income is between $25,000 and $34,000, up to 50% of your Social Security benefits may be subject to tax.

• If income is above $34,000, up to 85% of your Social Security benefits may be subject to tax.

For married filing jointly filers:

• If combined income is between $32,000 and $44,000, up to 50% of Social Security may be subject to tax.

• If combined income is above $44,000, up to 85% of Social Security benefits may be subject to tax.

Reviewing your annual Social Security benefit statement—which shows benefit payouts—with your financial professional and tax advisor can help you make informed decisions on your benefit-claiming strategy and potential tax and financial implications.

How Can You Manage Taxes on Social Security Benefits?

Consider these tips to minimize the tax burden on your Social Security benefits.

Adjust your tax withholding and quarterly estimates in anticipation of COLA.

Income tax withholding and/or quarterly estimated payments can save you from an unpleasant surprise come tax season. If you have earned income³ from employment while claiming Social Security, the COLA boost to your benefit may push your income over the threshold. Consider having income taxes withheld in the current year to help lower a possible tax bill.

If you take distributions from an IRA or other retirement plan, you can request to withhold income taxes, including the amount you expect to owe on Social Security benefits . Generally, your retirement plan custodian will withhold 10% on taxable distributions, unless you provide different withholding instructions.

Use IRS Form W-4V.

With Form W-4V, you can withhold 7%, 10%, 12% or 22% of your monthly Social Security income and apply it to your income taxes.

Aside from the withholding alternatives, you may consider working with your tax advisor to estimate any quarterly tax payments to avoid owing underpayment penalties and interest.

Consider a Roth conversion.

If you have employer retirement plans or IRAs, you may consider converting a portion to Roth accounts. While a Roth conversion may result in income tax liability now, it may provide long-term tax savings.

Roth IRAs are funded with after-tax dollars. In general, these plans grow tax-free, and you are not required to take a minimum distribution (RMD) during your lifetime. You pay no income taxes when the money is withdrawn as a qualified distribution after meeting certain requirements.

As a result, Roth IRA withdrawals in retirement don’t count as part of your provisional income. Working with a financial advisor and tax planner can help you determine the amount to consider converting into a Roth IRA, as this option may increase your income tax liability in the year of conversion.

Delay claiming Social Security benefits.

If you have not started taking your Social Security benefits, you may want to consider the pros and cons of delaying the benefits until your full retirement age (FRA), or as late as age 70.

The delayed start may increase your Social Security benefits by 8% per year in delayed retirement credits, which allows you to receive larger COLA increases, boost survivor benefits and lets you control your income tax situation. Work with your financial advisor to determine the best strategy for you.

Space out one-time taxable events.

A payout from selling your business, an inheritance, a Roth conversion or other one-time taxable event could tip you into an income bracket where you may owe tax on Social Security benefits.

Consider spreading out the payments as installments over multiple tax years instead of as a lump-sum payment. Along with potentially reducing the tax on your Social Security benefits, doing so might even reduce your income tax liability.

Consider the order of withdrawals.

If you have a large taxable and tax-advantaged portfolio, you may want to consider the timing of distributions from your taxable versus tax-advantaged accounts.

Any distribution from a 401(k) retirement plan or traditional IRA counts as ordinary income the year the money is withdrawn, whereas taxable account distributions are taxed at the preferred capital gains rates. Roth accounts are distributed income tax-free. Coordination and tax diversification can play a critical role in reducing your overall income tax liability now and later.

The conventional wisdom is to delay taking your retirement plan distributions until your RMD age and supplement your income needs by distributions from your taxable accounts. Consider whether this strategy works for your goals and objectives (e.g., retirement, legacy to heirs and charities).

The Takeaway on Social Security Benefits and Taxes

When making any financial decision, consider your cash flow needs first, and then consider the impact on your investment plan. Lastly, consider tax efficiency; don’t let the tax tail wag the decision you are making.

You don’t have to get a big tax bite taken out of your Social Security payments. Staying aware of the latest policies can help you plan for taxes. Talking to your financial advisor and tax professional about Social Security can help you make informed decisions about when and how to claim Social Security and manage your income tax situation (including investment strategies).