Update On Social Security Benefits and Tax Law Changes

The Social Security Board of Trustees recently released “The 2025 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds.” This annual report reveals that the Social Security system is now projected to collect enough tax revenue to fully cover promised benefits and administrative costs only through 2033 — a year earlier than previously projected.

As a current or future Social Security beneficiary and taxpayer, here’s what you need to know.

Is There a Social Security Benefit Account in My Name?

It’s not uncommon for some people to believe that all the money they’ve paid into Social Security sits in an account with their name on it to pay their future Social Security benefits. Where else would all the Social Security taxes paid on your wages or self-employment income go? The fact is, that’s not how Social Security works. There are no individual accounts.

What we do have is simply an unsecured promise from the government to pay future benefits. As indicated above, the system will become insolvent relatively soon unless changes occur. And any suggested change often triggers intense public outcry.

Will My Benefits Be Taxed?

Unless your income is relatively low, somewhere between 50% and 85% of your benefits will probably be taxed. The One, Big, Beautiful Bill Act is now law and establishes a higher standard deduction and a special bonus deduction for seniors. This new deduction could help reduce or eliminate the federal income tax hit on your benefits.

For 2025, the basic standard deductions are as follows:

• $15,750 for single taxpayers (up from $15,000 for 2025 before the OBBBA),
• $23,625 for heads of households (up from $22,500), and
• $31,500 for married couples filing jointly (up from $30,000).

For taxpayers age 65 and up or blind, there’s an additional standard deduction. For 2025, those amounts are:

• $2,000 for an unmarried individual age 65 or older or blind, or
• $1,600 for a married joint-filing individual age 65 or older or blind.

Additionally, with the passage of the OBBBA, those ages 65 and up can potentially claim a special bonus deduction of up to $6,000 or up to $12,000 for two married joint-filing individuals who are both at least 65, subject to an income-based phaseout rule. The new bonus deduction is available whether you itemize or not. It’s fully phased out when modified adjusted gross income hits $175,000 ($250,000 for married couples filing jointly).

How Much of My Social Security Benefits Will Be Taxed?

Under current tax law, you can calculate the amount of your Social Security benefits that will be subject to federal income tax by following three steps:

1. Determine your combined income. Your combined income includes half of your Social Security benefits plus all other taxable income items, including taxable pensions, wages, self-employment income, interest, dividends, and capital gains — plus certain tax-free income such as municipal bond interest.

2. Factor in your filing status. For single filers, if your combined income is $25,000 or less, your benefits won’t be subject to federal income tax. If your combined income is over $25,000, up to 50% of your benefits may be taxed. If your combined income is over $34,000, up to 85% of your benefits may be taxed.

For married couples who file jointly, if your combined income is $32,000 or less, your benefits won’t be subject to federal income tax. If your combined income is over $32,000, up to 50% of your benefits may be taxed. If your combined income is over $44,000, up to 85% of your benefits may be taxed.

3. Consider whether you’re still working. If you’re still working, you may have to pay more tax on your benefits than you think, depending on the combined income determined above.

If you do work while collecting Social Security, consider having extra tax withheld from your paychecks or making estimated payments to cover the additional tax. Your tax advisor should be able to determine how much you’ll need to pay during the tax year. That will help prevent you from owing more tax when you file your return.

What’s My Social Security Tax Obligation?

The Social Security tax you pay depends on whether you’re an employee or self-employed.

For W-2 employees. As an employee, your wages are hit with the 12.4% Social Security tax up to the annual inflation-adjusted wage ceiling. Half the Social Security tax bill (equal to 6.2%) is withheld from your paychecks. Your employer pays the other half (also 6.2%), so you never actually see it.

Unless you understand how the Social Security tax works and closely examine your pay statements, you may be unaware of how much the tax costs. For 2025, the Social Security tax wage ceiling is $176,100 (up from $168,600 for 2024). If your wages meet or exceed the 2025 ceiling of $176,100, the Social Security tax hit for this year will be a whopping $21,836 (12.4% times $176,100). Half comes out of your paychecks; your employer pays the other half.

For the self-employed. Because employees pay only half the Social Security tax, many may be unaware of the full magnitude of the Social Security tax. But self-employed individuals — including sole proprietors, partners and limited liability company members — are fully aware of the impact. That’s because they pay the entire 12.4% Social Security tax out of their own pockets, based on their net self-employment income. Companies pay no Social Security tax on amounts paid to independent contractors, which is a significant reason why they often prefer to use contractors rather than employees.

For 2025, the Social Security tax net self-employment income ceiling is $176,100 (the same as the wage ceiling for employees). So, if your 2025 net self-employment income is $176,100 or more, you’ll pay the maximum $21,836 in Social Security tax (12.4% times $176,100).

How Much Social Security Tax Will I Owe in Future Years?

The Social Security tax hit on your 2025 income is expensive enough, but it will only worsen in future years. That’s because the Social Security tax ceiling will continue to go up based on the inflation factor that’s used to justify the increases. In turn, maximum Social Security tax bills for higher earners will increase. The latest Social Security Board of Trustees projections, based on intermediate case figures, for the 2026 through 2034 Social Security tax ceilings are as follows:

• $183,600 for 2026,
• $190,800 for 2027,
• $198,900 for 2028,
• $207,000 for 2029,
• $215,400 for 2030,
• $223,800 for 2031,
• $232,500 for 2032,
• $241,800 for 2033, and
• $251,100 for 2034.

Assuming these projections are correct, the maximum Social Security tax on wages and net self-employment income in 2034 will be $31,136 (12.4% times $251,100).

System in Peril

The Trustees’ report shows that the Social Security system is on shaky ground. Politicians have known this for years, but no progress has been made in addressing the problem. To get the system back on track, Congress could enact unpopular Social Security tax hikes in the form of higher rates or some tax-law change that effectively implements higher Social Security tax ceilings (or both). Another, more painful fix would be to reduce benefits.

In the meantime, consider working with your financial advisor to develop a back-up retirement savings plan to supplement your expected Social Security benefits. Depending on your situation, this might include contributing to a tax-favored employer retirement plan or an IRA to ensure you’ll have enough money saved for your Golden Years.

Copyright 2025

This article appeared in Walz Group’s July 28, 2025 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.