It’s the eve of the presidential election as I write this. There’s a lot of talk about how pivotal this election is for our country. Is it true? Well, yes. But in other ways? Also, yes. Many things do in fact hang in the balance.

Like the House and Senate races. Congress is teetering on a razor’s edge, with Republicans holding the House and Democrats clinging to the Senate. Just a few seats here or there, and we’re looking at a very different legislative landscape (which will also, likely, mean a very different economic landscape). 

But, even with these edge-of-our-seat happenings, the question is: Should you be worried? 

Well, it depends on what level of worry you’re investing in. Some worry is normal. But living in a constant state of anxiety about the outcome, doomscrolling, and watching political analysts on repeat? To quote Shakespeare, “That way madness lies.” 

Don’t let yourself get stuck in the echo chamber of fear-mongering happening online. Yes, be informed, but also keep your focus on what’s important or within your grasp to control. Like tax moves you can make to prepare for what lies ahead.

Legislative and tax policy changes are constants we’ve come to expect at TAC Taxes. And, we’ll be here to help our Jefferson county clients (and you) navigate any and all upcoming changes to the tax code no matter what happens on Election Day. 

In keeping with that aim, I want to clue you in on a few adjustments the IRS recently announced that’ll affect your retirement tax planning: 1) 401(k) contribution limits will get an extra 500 dollar boost in 2025 (from this year’s 23k limit), and 2) the IRS has adjusted income ranges for IRAs and Saver’s Credit eligibility.

Basically, all this means more opportunities to save with those tax benefits intact, which I humbly suggest you take advantage of (just ask us how). 

Another retirement-tax-related adjustment is the Social Security Cost-Of-Living-Adjustment (COLA) update. (Don’t get your hopes up – it isn’t much.)

This is, understandably, hard news to swallow. If you’re a retiree on a fixed income, Social Security benefits can be a major factor in getting your bills paid every month. 

But don’t let this also be a stressor for you. My goal with today’s writing is that you would feel empowered to navigate the 2025 Social Security COLA change with confidence (and walk away with a few tax-related action steps, of course). 

2025 Social Security COLA Updates for Louisville Retirees
“It is not length of life, but depth of life.” — Ralph Waldo Emerson

Louisville Social Security beneficiaries, great news – the government’s attempt to help you out with the ever-increasing cost of living will be a boost just big enough to cover dinner on the town for you and your spouse (gee, thanks Uncle Sam). 

The Social Security Administration recently announced the 2025 Cost-Of-Living-Adjustment (COLA) – a modest 2.5 percent bump. This will go into effect with the December 2024 benefits, which are payable in January 2025 (but be sure to check the Social Security Administration’s website for the latest updates). 

This comes out to a bonus of about 46 dollars per month (if you’re receiving the typical benefit of 1.8k. If you’re getting the maximum benefit, it’ll come out to about 92 dollars per month). 

If that’s disappointing to you, that’s understandable (especially after a rate of 3.2 percent this year and 8.7 percent in 2023). A mere 2.5 percent is a pretty weak defense against the effects of inflation, with inflation clocking in at 2.4 percent this year. 

Which is why I want to emphasize that it’s more important than ever to implement strategies to minimize your retirement taxes. We’ll get into those in a minute.

The bright side of the 2025 Social Security COLA?

Despite what it seems like, the COLA situation might not be as bleak it seems. A lower increase than past year increases for COLA in 2025 could mean:

1) It’s easier to stay below tax thresholds – A bigger COLA increase would be more likely to bump you up into a higher income tax bracket.

2) You can preserve other income-based benefits that might have been sabotaged by a larger COLA increase. 

3) You can better manage your tax situation. For example: You could rely more on your retirement savings accounts or realize capital gains without feeling the sting of a higher tax bracket. 

Now, with the changing COLA rate, there are a few important things you’ll need to check on:

Review your tax withholding. Make sure that it aligns with your anticipated income (including the impact of the 2025 Social Security COLA adjustment). The adjustment might mean you need to increase your withholding. And under withholding could mean a hefty tax bill in the spring. 

Watch out for taxable interest. If you’ve reinvested your Social Security into savings, bonds, or other investments, remember: The interest you earn is taxable. 

Check state-specific rules. Federal tax law allows for some Social Security benefits to go untaxed, but state rules vary widely. It’s always smart to talk to a tax professional (I happen to know someone 😉 ) or check your state’s tax laws to make sure you’re in the clear. 

And if you’ve yet to retire, the COLA is good news for you – it boosts your future benefits by raising the foundation on which your benefits are calculated (the Primary Insurance Amount or PIA). When inflation goes up, the COLA goes up, which means your PIA goes up. 

Your action move here? Plan smart. Chat with a financial advisor to map out when to claim your benefits for maximum impact. Each year you wait, COLAs build on top of your higher base benefit.

 

It might feel like the 2025 Social Security COLA isn’t much to shield you from the effects of inflation. But staying proactive about tax planning and your long-term financial strategy can help you make the most of it, whether you’re in retirement or yet to cross over. And we can help you fine-tune your tax situation all throughout the process. Just grab a time on our calendar to chat with us:
502-964-5000

 

To retiring securely,

TAC Taxes