Extra Payment from Social Security? Watch Your Tax!

By Russell W. Hall, CFP®, CPWA®

Earlier this year, we wrote about the Social Security Fairness Act, which authorized Social Security payments to many workers who had previously been denied benefits because of their government pensions. If you’re in that boat, you’ve probably started receiving monthly payments as well as a lump sum payment for past benefits (since the law was retroactive to the start of 2024).

It’s that lump sum that could be an issue for your taxes, since in many cases, there was no federal tax withholding from the payment. We’re seeing some clients whose taxable income will be significantly higher in 2025 (in some cases, close to double) because of the added monthly payments and lump sum. More money is a good problem to have, of course, but underpayment of taxes and getting hit with penalties is not.

We suggest talking to your tax person now to see if any action needs to be taken in the form of additional withholding or estimated payments. There is also a “lump-sum election” option to calculate some of the taxable benefits from 2024 as if they were taxed in that tax year—more information here. If you’re a client of Eclectic, your advisor can also help go over your taxes and see if this will be an issue for you.

If you have additional questions, please schedule a complimentary phone call or meeting with one of our fee-only financial advisors.