Things to Know About Lump-Sum Payment of Social Security Benefits

Many retirees are not aware that Social Security monthly disability and retirement benefits are potentially federal and (in some states) state taxable. Social Security beneficiaries who receive monthly benefits should be aware that federal income tax withholding from monthly benefits is an option. For federal retirees, voluntary federal income tax withholding from monthly Social Security retirement benefits may be a recommended and wise move, especially if a federal retiree is not having an sufficient amount of federal income tax being withheld from other sources of retirement income, such as a CSRS or FERS annuity or from the Thrift Savings Plan (TSP).

The recommendation for having federal income withholding from Social Security benefits is even more important for those retirees who may receive a “windfall” such as a retroactive Social Security payment or a refund of prior year underpaid Social Security benefits.

The Social Security Fairness Act (SSFA), passed into law on January 5, 2025, abolished the 40-year  Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). The GPO and the WEP reduced and in many cases eliminated Social Security benefits for millions of eligible Social Security beneficiaries, including thousands of federal retirees.

The SSFA has a “look back” period to the end of 2023. In many cases, federal retirees will receive a retroactive lump-sum payment for higher monthly benefit payments retroactive to January 2024, and higher monthly benefit payments starting in 2025.

The Social Security Administration (SSA) announced on February 25 that most WEP- and GPO- affected beneficiaries will receive their one-time retroactive lump sum payments by the end of March 2025 and higher monthly benefit payments will begin in April 2025. The SSA had said initially in January 2025 that because of understaffing and budget problems at the SSA, Social Security beneficiaries affected by the provisions of the SSFA should not expect their retroactive lump-sum adjustment payment and higher monthly benefit payments until early 2026.

While Social Security beneficiaries certainly welcome the additional Social Security payments to be received earlier than initially projected, there are tax planning items to be considered for the year 2025, especially when it comes to federal income taxes. Here are several of those items:

1. Additional monthly benefit subject to federal income tax. Additional monthly benefit could result in a higher portion of Social Security benefits being subject to federal income tax. The percentage of a Social Security beneficiary’s annual benefits that is subject to federal income tax depends on the beneficiary’s annual “provisional income.” That percentage can be 0 percent, 50 percent or 85 percent. Included in “provisional income” is 50 percent of the beneficiary’s monthly Social Security retirement benefit received during the year. A beneficiary who, as a result of the SSFA passage, receives a lump-sum retroactive payment for 2024 and a higher monthly benefit in 2025, will likely have a greater portion of their Social Security benefits subject to federal income taxes during 2025.
2. Widow(er)’s tax penalty. A widow(er)’s tax penalty can occur when a widow or a widower shifts from a married joint filing status in one year to a single filing status in the year following the death of a spouse. For example, a spouse who died anytime during 2024 could result in the increase of the surviving spouse’s income tax liability in 2025 when the surviving spouse must file as single. Widow(er)s are also likely to receive the largest retroactive lump-sum benefit payment and monthly benefit increase because when the GPO was in effect,  the GPO may have completely eliminated the surviving spouse’s prior monthly spousal benefit.
3. Federal income tax implications. Many Social Security beneficiaries may be especially worried about receiving substantial a lump-sum payment of benefits going back to January 2024 and how it will affect their 2025 federal income tax liability. The average lump-sum retroactive payment is $6,725. A substantial lump-sum refund payment could push a Social Security beneficiary into a higher federal marginal tax bracket.
4. Effect on “stealth” taxes. Lump-sum retroactive benefit payments received in 2025 could affect “stealth” taxes that occur when income increases. For example, the “net investment income tax’ (NIIT) (equal to 3.8%) is imposed on an individual’s investment income (interest, dividends, and capital gains) when the individual’s adjusted gross income exceeds $250,000. Another example is Medicare Part B and Medicare Part D monthly premiums. Higher adjusted gross income in 2025 could result in higher monthly premiums for Medicare Parts B and D premiums in 2027.

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The following example illustrates:

Jason, age 73, is a retired federal employee. He entered federal service in 1974 and worked 36 years before retiring in 2010. He was covered under the Civil Service Retirement System (CSRS) and therefore was not covered by Social Security while in federal service. After retiring from federal service, Jason earned the minimum 40 credits of Social Security and therefore became “fully insured”, eligible for a Social Security monthly benefit payment. He waited to start receiving his monthly Social Security retirement benefit until 2022, when he became 70 years old. He also knew that his monthly benefit would be affected by the WEP. Delaying the start of his monthly benefit resulted in a delayed retirement credit of 32 percent. With the WEP, Jason’s monthly Social Security was reduced and continued to be reduced by $550 per month. The $550 WEP reduction was in effect during 2022, 2023 and 2024. With the passage of SSFA, Jason’s WEP no longer is in effect, and he is eligible for a retroactive lump-sum payment for all WEP reductions dating back to January 2024. He received a lump-sum- payment of $7,700 on March 7, 2025.

The IRS expects individuals to pay their federal income taxes as they earn or receive income. They do this through payroll or retirement federal income tax withholding or by making quarterly estimated federal tax payments. When an individual’s federal income tax withholding and estimated tax payments are less than they should be, the individual  may owe an “under withholding” penalty when the individual files his or her federal income tax return. In particular, if the individual did not cover (through withholding and estimated tax payments) at least 90 percent of their current tax year’s tax liability or 100 percent of their prior year’s liability (110 percent for higher income individuals), then the individual may owe an under withholding penalty.

In Jason’s example, since he received a lump-sum retroactive Social Security pay of $7,700 in March 2025, he is advised make a federal estimated tax payment for the first quarter of 2025. This payment is due April 15, 2025. He should pay an amount that tis equal to at least 90 percent of what his federal tax liability is resulting from the $7,700 lump-sum payment. For example, if Jason is in a 24 percent federal marginal tax bracket for 2025, then 24 percent of $7,700 equals $1,848. 90 percent of $1,848 equals $1,663. Therefore, Jason should make a federal estimated tax payment of $1,663 due April 15, 2025. In addition, since Jason’s monthly Social Security retirement benefit payment will be increasing by $550 per month starting in Aprill 2025 (because the WEP reduction no longer applies), Jason should consider having federal income tax withheld from his monthly Social Security payment. He may do so by submitting to the SSA IRS Form W-4V (Voluntary Withholding Request). He can choose to have federal income tax withheld at one of four set percentages (7,10,12 or 22 percent).

It is important for Social Security beneficiaries to be proactive with respect to their current year federal income tax liability, especially for those beneficiaries with irregular income streams and who received the Social Security lump-sum payment and higher monthly benefit payments resulting from passage of the SSFA. They may also want to ask their tax advisors how passage of the SSFA may affect their current year state income tax liabilities. By understanding the need to withhold additional federal (and perhaps state) income taxes and making estimated tax payments, Social Security beneficiaries can avoid unnecessary IRS and state under withholding penalties.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Ed Zurndorfer, EA, ATA, CFP®, CLU®, ChFC®, CEBS®, ChFEBC℠: Federal Employee Benefits Expert

A former career Federal employee, Ed has published a staggering 1,200+ separate articles on Federal Benefits and Retirement!
Just “Google” his name, and you are likely to find a plethora of sites that contain his writings. Drawn to its mission to reach, teach
and serve Feds, Serving Those Who Serve is the only financial planning practice with which Ed has chosen to affiliate in over
20 years teaching. In addition to conducting Federal Benefits seminars for Serving Those Who Serve, you can find Ed’s
writings here on our blog in the FedZone, and on Fed-Soup, MyFederalRetirement, FederalNews Radio and NITP.

He is a member of the Maryland Society of Accountants, the National Association of Enrolled Agents, the International Society of Certified Employee Benefits Specialists, the Financial Planning Association, the National Association of Health Underwriters,
and the Society of Financial Service Professionals. Since 1999, Ed has taught many thousands of Federal employees about
their benefits, in person and at Federal agencies all over the country. Ed is a true national treasure.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.