Social Security and Taxes: What’s Changing in 2025

Social Security benefits are tied to inflation, and after several years of hefty cost-of-living adjustments (COLAs) to keep up with rising prices, adjustments are going to be lower in 2025. Inflation has cooled somewhat the past year (though remains elevated), so the COLA increase for 2025 is much smaller than in recent years. However, there are other important changes for retirees to consider as they plan for the year ahead.

While any increase in Social Security benefits is always welcome, even a small amount, it’s important to understand how this might impact your overall retirement income—and taxes. For many retirees, income comes from a variety of sources: Social Security, pensions, tax-deferred retirement accounts (e.g., 401k’s and IRA’s), taxable accounts, interest-bearing savings accounts, and other investments. All these sources can affect how much you end up paying in taxes.

If you’re planning to retire in 2025, you’ll see a boost in the maximum Social Security benefit, but you’ll also want to ensure you’re minimizing the taxes on your retirement income. Since up to 85% of your Social Security benefits may be taxable, it’s essential to take a full look at your financial situation from a tax perspective.

What’s Happening with Social Security Benefits?

For 2025, the Social Security COLA is 2.5%, which results in an average increase of about $50 per month. The maximum Social Security benefit will also increase. For those retiring at full retirement age (FRA) in 2025, the maximum monthly benefit jumps to $4,018, up from $3,822 in 2024.

But, here’s where things get tricky: Social Security benefits may be taxable depending on your overall income. For individual tax filers with combined income (which includes things like wages, pensions, and interest) between $25,000 and $34,000, up to 50% of your Social Security benefits could be taxed. If your combined income exceeds $34,000, then up to 85% of your benefits may be taxable.

For couples filing jointly, if your combined income is between $32,000 and $44,000, up to 50% of your Social Security benefits may be taxed. If your income exceeds $44,000, up to 85% of your benefits may be taxed.

What Happens if You Work While Retired?

Another key point to note is how working while retired can impact your benefits. Many retirees opt to take on part-time work to stay active, earn a little extra cash, or help cover expenses. But, if you’re under full retirement age (FRA), Social Security will reduce your monthly benefits if you earn more than a certain amount.

For 2025, if you’re under FRA for the entire year, Social Security will withhold $1 for every $2 you earn over $23,400. If you reach FRA during the year, you get a little more leeway: You can earn up to $5,180 per month without losing any benefits, and Social Security will withhold $1 for every $3 you earn over that limit until you hit FRA.

Once you’ve reached FRA, you can earn as much as you want without any reduction in your Social Security benefits.

Understanding the Sources of Your Income

Beyond Social Security, there are other income sources that affect your taxes. The tax brackets have increased in 2025, but the adjustment is the smallest one we’ve seen in years- just about 2.8%, reflecting the cooling of inflation. Here are the updated brackets:

• 10%: $0–$11,925 for singles, $0–$23,850 for couples

• 12%: $11,926–$48,475 for singles, $23,851–$96,950 for couples

• 22%: $48,476–$103,350 for singles, $96,951–$206,700 for couples

• 24%: $103,351–$197,300 for singles, $206,701–$394,600 for couples

• 32%: $197,301–$250,525 for singles, $394,601–$501,050 for couples

• 35%: $250,525–$626,350 for singles, $501,051–$751,600 for couples

Your goal should be to keep your income within a tax-efficient range. If you're in early retirement, consider doing a Roth conversion to take advantage of lower tax brackets. You’ll pay taxes on the money you convert now, but once it’s in a Roth account, it grows tax-free, and you won’t pay taxes when you take it out in the future.

However, be careful—other factors could push you into a higher tax bracket. For example, if your Social Security benefits go up along with interest from savings (especially with those high-interest I-bonds, savings accounts, or CD’s), plus any withdrawals from tax-deferred retirement accounts, your taxable income could rise enough to increase the taxes on your Social Security benefits.

Also, if you’re receiving health insurance subsidies through the Affordable Care Act (ACA), it’s important to watch your income level. Earning too much could reduce or eliminate the subsidies you currently receive.

The Bottom Line

Social Security COLAs may seem like a win in times of inflation, but for retirees, it’s critical to pay attention to how each piece of your income fits into the broader tax picture. Planning ahead and being strategic about your income sources can help you keep more of your hard-earned money in your pocket. And with changes to Social Security, taxes, and health care subsidies, a little bit of careful planning can go a long way in securing your financial future in retirement.