As the Social Security Administration issues retroactive payments under the newly enacted Social Security Fairness Act, millions of retirees are celebrating increased benefits.
However, while this financial windfall is welcome news for many, there is a critical caveat that retirees must consider: potential tax implications associated with these increased benefits. That’s because a significant portion of your Social Security income may be subject to federal taxes, depending on your overall income level.
So, to maximize your Social Security Fairness Act benefits, there are some key tax considerations to be aware of. Here’s more of what you need to know.
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The Social Security Fairness Act 2025
The Social Security Fairness Act, signed into law on January 5, 2025, eliminated two long-standing provisions: the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO).
Those provisions had reduced Social Security benefits for certain public-sector retirees, including teachers, firefighters, police officers, and federal employees covered by the Civil Service Retirement System.
As a result, affected retirees (nearly 3.2 million by some estimates) will now receive their full Social Security benefits, which could increase monthly payments by hundreds or even more than a thousand dollars for some.
As Kiplinger has reported, the SSA has already started implementing the change, and eligible beneficiaries have been issued retroactive payments.
The Social Security Administration (SSA) says, “Most people will receive their one-time retroactive payment by the end of March, which will be deposited into their bank account on record with Social Security.”
However, as these payments flow and monthly benefits increase, recipients will need to navigate a changed income landscape to avoid tax surprises.
Retroactive payments tax implications
According to FAQs on its website, the SSA says, “Some people’s benefits will increase very little while others may be eligible for over $1,000 more each month.”
Even though the amounts will vary considerably, increased Social Security benefits from the Act will likely affect many recipients’ tax situations.
Note: Thankfully, the payments are being received now, in 2025, so the federal returns being filed currently for the 2025 tax season shouldn’t be impacted. But the time is now to plan so you don’t have a tax surprise on your 2025 return (those typically filed in early 2026). Your Social Security Fairness Act payments should be reflected on your SSA-1099 for 2025.
Here are some factors to consider.
Increased Taxable Income: The boost in benefits may increase the taxable portion of recipients’ Social Security income. Under current tax law, up to 85% of Social Security benefits can be subject to tax, depending on the recipient’s combined income, also referred to as provisional income.
That means that more retirees may cross the threshold determining how much of their Social Security is subject to tax, potentially leading to a larger tax bill.
“Provisional or combined income” includes adjusted gross income, tax-exempt interest, and half of Social Security benefits. So, you can see how increased benefits from the Social Security Fairness Act will impact that calculation.
- If your combined income is under $25,000 (single) or $32,000 (joint filing), there is no tax on your Social Security benefits.
- For combined income between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint filing), up to 50% of benefits can be taxed.
- With combined income above $34,000 (single) or above $44,000 (joint filing), up to 85% of benefits can be taxed.
See the chart below to further illustrate.
|
Combined Income |
Social Security Tax Amount |
|---|---|
|
Under $25,000 (single) or $32,000 (joint filing) |
No tax on your Social Security benefits |
|
Between $25,000 and $34,000 (single) or $32,000 and $44,000 (joint filing) |
Up to 50% of Social Security benefits can be taxed |
|
Above $34,000 (single) or above $44,000 (joint filing) |
Up to 85% of benefits can be taxed. |
*Single includes single, head of household or qualifying widow or widower
Tax Bracket Shifts: The substantial increase in Social Security benefits might push some recipients into higher federal income tax brackets, affecting their overall tax liability. That is particularly relevant for retirees on the cusp of a higher tax bracket.
For more information, see Tax Brackets and Federal Income Tax Rates for 2024 and 2025.
Lump-Sum Back Payments: The retroactive payments issued due to the new law could cause many beneficiaries a significant one-time spike in income.
- As mentioned, that lump sum could push recipients into a higher tax bracket for the tax year it’s received, potentially leading to a higher tax burden.
- The sudden increase in income could also affect various income-based deductions and credits, limiting or eliminating eligibility for that tax year.
Medicare Premiums: The Social Security Fairness Act could also impact Medicare premiums by moving retirees into higher income brackets, potentially triggering IRMAA surcharges.
- The Medicare Income-Related Monthly Adjustment Amount (IRMAA) is an amount you may pay in addition to your Part B or Part D premium if your income is above a certain level.
- Since IRMAA is based on a two-year look-back, the 2025 increases could affect premiums starting in 2027.
- Even small income changes can influence IRMAA, and retroactive payments may significantly boost income for the year received.
State Taxes on Social Security Income: While federal taxes on Social Security benefits follow uniform rules, state-level taxes vary. Some states fully tax Social Security benefits, others partially, and some don’t. So, the increased benefits resulting from the Social Security Fairness Act could have different implications depending on the recipient’s state of residence.
To learn more, see States That Still Tax Social Security Benefits in 2025.
Social Security Fairness Act and taxes: Bottom line
If you’re receiving Social Security benefits, understanding the potential tax impacts of the Social Security Fairness Act is essential. A tax professional can help you navigate these changes and develop strategies to manage your increased benefits, like adjusting withholdings or making estimated tax payments.
Stay informed and proactive as the Social Security Administration implements these updates. By planning strategically, you may be able to maximize your benefits while minimizing tax surprises.