Why Social Security COLAs Can Increase Your Taxes

Since 2016, the share of Social Security recipients paying taxes on benefit income has inched up from 41 percent to 50 percent, according to the Social Security Administration (SSA). Over the same period, federal income taxes paid on benefits increased by more than half, from $32.8 billion in 2016 to $50.7 billion in 2023.

The determining factor is what the IRS calls “combined” or “provisional” income: adjusted gross income (as figured on your 1040 form) plus tax-free interest (for example, from investments in state or municipal bonds) plus half of your Social Security payments.

If that sum exceeds $25,000 for an individual taxpayer or $32,000 for a married couple filing jointly, they may owe taxes on up to 50 percent of their benefit income. Above $34,000 for a single filer or $44,000 for a couple, up to 85 percent of benefits can be taxed. (The IRS has an online tool you can use to calculate exactly how much of your Social Security income is taxable.)

You’re unlikely to owe taxes on your benefits if Social Security is your only income. But if you have other sources of money, such as work, a pension or withdrawals from savings, you might find yourself over the line. That leaves some beneficiaries “very surprised and shocked,” says Laurie Smith, a tax partner at Wiss & Company, a New Jersey-based accounting firm.

“We have clients that stay a little bit more in tune to tax law, but in general, most taxpayers are unaware that a significant amount of their benefits are taxable,” let alone that annual COLAs can increase that likelihood, Smith says.

Part of the plan

Had they been linked to inflation when Congress established them 41 years ago, the minimum income levels for taxing benefits would now be around $77,000 for a single filer and $99,000 for a couple. But setting the thresholds as fixed dollar amounts unaffected by inflation was part of Congress’ plan from the start, according to SSA research on the history and effect of taxing benefits.

Lawmakers set the rules so that Social Security income would be taxed less heavily than other forms of retirement income, like pensions, but they intended for the gap to narrow over time as more and more people crossed the income threshold and owed taxes on their benefits.

“It’s important to keep that in mind when you are planning for resources in retirement — that taxes do exist, and a larger share of people will end up paying some taxes on their Social Security benefits,” Chen says. “Regardless of whether we think it’s fair or not, for planning purposes, that’s a component.”

That means accounting for the tax implications of your prospective retirement income.

“Many focus on creating income that will meet their spending needs. However, with that income comes taxes,” says Colleen Carcone, director of wealth planning strategies at TIAA. “While you may not be able to control the Social Security portion of the equation, you can certainly take steps to reduce AGI [adjusted gross income] and investment income.”

For example, “one thing we work with our clients on is looking at converting their IRAs to Roth IRAs,” Smith says. Because contributions to Roth accounts are taxed going in, the money you take out in retirement is not treated as taxable income.

Here are a few other ways accountants and advisers suggest to reduce or avoid taxes on Social Security benefits by way of lowering your overall taxable income.

Contribute to a retirement account. Until April 15, people ages 50 and older can put up to $8,000 into an IRA and deduct it from their 2024 taxes. “So, even though we are already in calendar year 2025, there is still time to make an impact on your 2024 tax bill,” Carcone says. The contribution caps will be the same for 2025 taxes. .

Donate to charity. If you are over age 70½ and transferred up to $105,000 directly from an IRA to a charity (or charities) in 2024, you can exclude that money from your taxable income, even if you don’t itemize deductions on your tax return. For 2025, the limit for these qualified charitable donations (QCDs) goes up to $108,000.

Remember that for donations to count as QCDs, you can’t withdraw the money and then give it to charity — it must go straight from the IRA to the recipient. Contact your IRA administrator to ensure a gift qualifies and to facilitate the transfer. 

Spread out work income. If a client who owes taxes on benefits also does consulting or other work, “we talk to them about spreading out that income,” Smith says. “Maybe not receiving all of it in one year but taking a smaller amount of income over a longer period of time.”