Planning Around Social Security Cost of Living Adjustment for 2025 by Joanie Stein, CPA
Posted on November 13, 2024
by
Joanie Stein
Recipients of Social Security and Supplemental Security Income (SSI), including senior citizens, widows and persons with disabilities and special needs, will receive a 2.3 percent cost-of-living adjustment (COLA) to the benefits they receive in 2025. The increase translates to an average of $50 in additional monthly benefits, which is on par with the last 20 years but small compared to the most recent adjustments of 3.2 percent in 2024 and 8.7 percent in 2023.
The Social Security Act ties the annual COLA to the Consumer Price Index (CPI), a critical measure of inflation. Yet, the adjustments generally are insufficient for most individuals to afford the rising costs of aging or the perpetual care of family members with disabilities or special needs. Instead, individuals at all income levels with and without special needs should rely on other estate planning strategies to ensure they and their loved ones afford the care they need and deserve throughout their lives.
For example, allocating savings to tax-advantaged 401(k) plans, individual retirement accounts (IRAs) and insurance policies can help fund a comfortable retirement for you and provide additional financial benefits to surviving family members long after you are gone. Trusts are another option that can also protect assets from creditors and help ensure a smooth transfer of ownership during your life and death. When family members or loved ones have physical or mental disabilities or chronic illnesses that impede their ability to care for themselves, a special needs trust should be considered to finance those individuals’ quality of care without jeopardizing their rights to receive government benefits. Under these circumstances, the trust assets and the income they generate are not considered to be owned by the beneficiaries.
Another important consideration for recipients of Social Security retirement, survivor and disability benefits is federal income tax. Taxes are imposed on Social Security benefits when your combined income, including earnings, certain retirement plan withdrawals, investment income, non-taxable interest and half of your Social Security benefits, exceeds $25,000 or $32,000 if you are married and filing joint tax returns. You can reduce the odds of receiving a sizeable federal tax bill by choosing to have the SSA withhold a percentage of your monthly payments. You may also have opportunities to minimize your tax burden in retirement by donating up to $100,000 of your retirement account required minimum distribution (RMD) directly to a qualified charity. Or, you may convert a pretax 401(k) or traditional IRA into a Roth IRA, which will require you to pay tax at the time of the conversion in return for tax-free withdrawals in retirement.
It is important to regularly review your “my Social Security” account at www.ssa.gov/myaccount and work with your advisors to implement sound estate planning strategies that can help you prepare for the retirement you desire.
About the Author: Joanie B. Stein, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she works with individuals and closely held businesses to implement sound strategies intended to preserve wealth and improve tax efficiency. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or at info@bpbcpa.com.
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