Most taxpayers are thrilled to receive unexpected income—until they calculate the impact it will have on their tax bill. Over 3 million Americans will be receiving additional Social Security income in 2025 thanks to the Social Security Fairness Act (SSFA). You can help. Make sure your clients who are affected by this change understand how it will impact their taxes, then show them options to help mitigate that higher tax bill.
Why are some people receiving additional income?
The SSFA, signed into law on January 5, repealed two long-standing Social Security provisions that reduced or eliminated Social Security benefits for many people.
• The Windfall Elimination Provision (WEP) reduced benefits for those who received a pension from a job not covered by Social Security.
• The Government Pension Offset (GPO) reduced spousal or survivor benefits for those whose spouse received a government pension.
Affected individuals included teachers, police officers, firefighters, federal employees covered by the Civil Service Retirement System, and people whose work was covered by a foreign social security system.
Starting this month, these individuals will begin receiving their full benefits. Even better, the change is retroactive to January 2024, so increased payment amounts for months prior to April will be paid out in a lump sum. Most of these retroactive benefits have already been deposited into accounts.
What is the impact of the extra income?
Depending on a person’s total income and filing status, the higher benefit payment amount and/or the lump-sum retroactive payment might increase taxable income. Retirees might experience:
• A new or increased tax on benefits. Up to 50% of Social Security benefits can be taxable if combined income exceeds certain thresholds ($25,000 for single filers and $32,000 for joint filers in 2025)—and that increases to 85% if combined income exceeds $34,000 for single filers or $44,000 for joint filers.
• A higher income tax bracket. The income boost could push some people into a higher tax bracket.
• Medicare surcharges. Additional income this year could affect future Medicare premiums.
How can you help?
If the increased benefit amount or the one-time retroactive payment will cause an issue for some of your clients, you have the opportunity to encourage them to take steps to mitigate a higher tax bill. For example, you might mention options like the following:
• Making quarterly estimated tax payments. Or they might consider adjusting withholdings from monthly Social Security payments.
• Bypassing the tax on a required minimum distribution (RMD) from an IRA. Instead of taking a taxable required minimum distribution, IRA owners age 70½ and older can make a tax-free distribution directly to a qualified charity (up to $108,000 in 2025) that counts toward their RMD if one is due. This can even benefit clients who do not itemize.
• Reducing withdrawals from retirement accounts. Even without making a charitable distribution from an IRA, clients who can take less from their retirement accounts can reduce the tax on those distributions.
• Harvesting tax losses in brokerage accounts. Clients in higher tax brackets may choose to sell certain investments held in taxable accounts at a loss, then use that loss to lower or eliminate taxes due on extra income during the year.
• Making charitable gifts that qualify for an income tax deduction. The deduction helps offset the additional income, and there are a number of different charitable gift options that qualify. These include gifts of cash, securities, tangible personal property, real estate, or a life insurance policy, as well as contributions to a donor-advised fund. Some clients may find it beneficial to create a gift that also provides them with an income stream for retirement (a charitable gift annuity or charitable remainder trust)—gifts that qualify for deductions when they are initially funded.
Keep this unique situation in mind as you talk with your clients this year. Make sure they understand the tax impact of the increased income and help them explore tax reduction strategies. This is a powerful opportunity to start or continue a discussion of the important role that life insurance and annuities can have in financial and retirement planning.
