Federal Taxation of Social Security Benefits: What You Need to Know for 2025

For many Americans, Social Security benefits provide a critical source of income in retirement. However, not everyone is exempt from paying taxes on these benefits. Understanding how Social Security benefits are taxed can help you better plan for retirement and minimize your tax liability.

How Are Social Security Benefits Taxed?

Individuals who rely solely on Social Security as their primary source of income are generally not subject to federal income tax on their benefits. However, those with additional sources of income may find that a portion of their Social Security benefits is taxable. The percentage of benefits subject to taxation depends on a calculation known as provisional income.

Provisional income is the sum of:

Tax-exempt interest (such as income from municipal bonds),
50% of your Social Security benefits, and
Other non-Social Security income sources, including wages, pensions, and dividends, which are included in your adjusted gross income (AGI).

Tax Rates for Single Filers:

Provisional income below $25,000: Social Security benefits are tax-free.
Provisional income between $25,000 and $34,000: Up to 50% of Social Security benefits are subject to federal income tax.
Provisional income above $34,000: Up to 85% of Social Security benefits are taxed.

Tax Rates for Joint Filers:

Provisional income below $32,000: Social Security benefits are tax-free.
Provisional income between $32,000 and $44,000: Up to 50% of Social Security benefits are taxed.
Provisional income above $44,000: Up to 85% of Social Security benefits are taxed.

To simplify tax payments, you can opt to have federal income tax withheld from your monthly Social Security benefits at rates of 7%, 10%, 12%, or 22%. To do so, you must complete IRS Form W-4V.

Social Security Changes for 2025

Looking ahead to 2025, several important changes are on the horizon for Social Security benefits and taxation.

Cost of Living Adjustment (COLA)

The Social Security Administration (SSA) has announced a 2.5% cost-of-living adjustment (COLA) for 2025. This adjustment will result in an increase in monthly benefits:

For individuals, the average monthly Social Security check will rise from $1,927 to $1,976, a $49 increase.
For married couples, the average monthly benefit will increase from $3,014 to $3,089, a $75 increase.

Social Security Tax Limit Increase

In 2025, the Social Security payroll tax limit will increase from $168,600 to $176,100, a 4.4% rise. This means that income above $176,100 will not be subject to Social Security tax, but individuals earning under or near this threshold will pay more in Social Security taxes next year. The total Social Security tax rate is 12.4%, with 6.2% paid by the employee and 6.2% paid by the employer. High earners should plan accordingly for this increase.

Federal Tax Credit for Electric Vehicle (EV) Chargers

In addition to Social Security changes, those considering installing an electric vehicle (EV) charger in their home can benefit from a federal tax credit. Originally introduced by the Inflation Reduction Act of 2022, this credit has been extended through 2032.

Credit Details:

Homeowners can receive a nonrefundable tax credit of 30% of the cost of the EV charger and its installation, up to a maximum of $1,000.
Businesses can also take advantage of this tax credit at a higher rate. In general, businesses are eligible for a credit equal to 6% of the cost (or 30% if specific conditions are met), capped at $100,000 per EV charger.

Plan Ahead and Stay Informed

Changes to Social Security and other federal tax credits in 2025 will affect many taxpayers. Whether you're concerned about Social Security benefit taxation or interested in federal tax credits for energy-efficient upgrades like EV chargers, it’s essential to stay informed and plan ahead. At Obregon & Associates, we’re here to help you navigate these changes and ensure you’re making the best financial decisions for your situation.

If you have any questions about these updates or other tax matters, contact us today at 618.281.9700. We’re here to help you stay on top of the latest tax laws and maximize your benefits.