Millions of retirees will be experiencing significant changes to their Social Security benefits. This is after Social Security updated its rules, and now retirees could start seeing larger checks, while some might start facing 100% withholdings of their monthly benefits.
These changes are a result of the Social Security Fairness Act, which was signed into law in January 2025, and now over 3,2 million Americans could see increases in benefits. On the other hand, a change in rules could see some retirees lose up to 100% of their monthly benefits due to changes in withholdings for overpaid or wrongly paid benefits.
Who is Seeing Larger Checks?
The signing into law of the Social Security Fairness Act by Former President Joe Biden in his final days in office was meant to undo years of reduced benefits endured by certain public-sector workers. The law had two provisions: the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO), which affected many retirees.
The repeal of these two provisions is good news for over 2.3 million seniors who have already received increases in their benefits, with some receiving up to $1,100 more every month. The affected retired workers include teachers, firefighters, police officers, and other public employees who received deductions in their working days because they received pensions from employers who did not pay into Social Security.
However, over 900,000 complex cases are yet to be resolved, and they could take time because the Social Security Administration is manually processing them. So, if you are one of those previously affected by the WEP and GPO provisions and haven’t received your increase yet, you could be among those with complex cases.
Who’s Facing 100% Withholdings?
While some are enjoying increases in their monthly checks, others could be at risk of losing 100% of their monthly checks. When you are working, your employer handles federal tax withholdings on your behalf, but in retirement, you are responsible. If you are not careful, the IRS might penalize you or withhold your entire benefits to cover unpaid taxes. Here is a brief explanation of how the withholding works:
- 401(k), pension, and IRA distributions usually have income tax automatically withheld. If you get periodic payments, you can adjust withholding using Form W-4P.
- For nonperiodic payments (like one-time distributions), the IRS automatically withholds 10% unless you request more using Form W-4R.
- If you take a 401(k) or pension distribution eligible for rollover but choose to receive it directly, expect a flat 20% withheld unless you roll it over directly to another retirement account.
Now, for those who receive Social Security benefits, the SSA does not automatically withhold taxes from your monthly check, and therefore, you have to actively submit Form W-4V. If you fail to do so and your total income exceeds IRS thresholds, you could be at risk of a large tax bill or face estimated tax payments every quarter.
How to Stay Compliant and Avoid Penalties
There are two ways to stay on the good side of the IRS;
- Withholding from benefits: File the appropriate forms (W-4P, W-4R, or W-4V) to have taxes taken out of your distributions automatically.
- Estimated quarterly tax payments: Use Form 1040-ES to send taxes to the IRS on your own. Just make sure your payments equal 90% of your expected current-year tax bill, or 100% of last year’s bill (or 110% if you earned over $150,000).
Failure to meet these two benchmarks might put you at risk of facing penalties, including 100% withholding of your benefits.
Don’t Forget to File State Taxes
Besides the federal government, you might also be required to pay taxes to your state, and you have to do so manually because many retirement distributions do not withhold state income tax automatically. You must also handle taxes for Social Security benefits because they are not subject to state withholding.
Social Security has updated its rules, and some retirees could be seeing larger checks while others could be at risk of 100% withholding. To be on the safe side, ensure that you double-check that your address, direct deposit, and tax withholding choices are up to date.