Understanding Social Security & Medicare Taxes: What to Expect in 2025

Death and taxes—two things in life we can’t escape. If you’re working or retired, understanding how Social Security and Medicare taxes impact your income, benefits, and retirement plans is crucial. Here’s a breakdown of how these programs are funded, how benefits are taxed, and what to expect in 2025.

1. Social Security Taxes: How They’re Funded

Social Security is funded through payroll taxes collected under:
FICA (Federal Insurance Contribution Act): For employees
SECA (Self-Employment Contribution Act): For self-employed individuals

Employee Contributions:

• 6.2% of wages goes toward Social Security, matched by employers.
• Maximum taxable earnings for 2025: $168,600 (earnings above this are not taxed for Social Security).

Self-Employed Contributions:

• Pay the full 12.4% tax (since they don’t have an employer to match the contribution).
• Allowed to deduct half of the tax when filing income taxes.

2. Taxes on Social Security Income

Your Social Security benefits are taxed based on your provisional income, which includes:
Adjusted Gross Income (AGI)
Tax-exempt interest (e.g., municipal bond income)
50% of Social Security benefits

How Much of Your Benefits Are Taxed?

• Single filers:
  • $25,000 – $34,000 → Up to 50% of benefits taxable
  • Over $34,000 → Up to 85% of benefits taxable
• Married filing jointly:
  • $32,000 – $44,000 → Up to 50% taxable
  • Over $44,000 → Up to 85% taxable

Example: If you and your spouse have a combined income of $50,000 (including Social Security), 85% of your benefits may be taxed at your marginal income tax rate.

3. State Income Taxes on Social Security

Most states do NOT tax Social Security benefits (41 states fully exempt benefits).

9 states that tax Social Security benefits (with restrictions):

• Colorado: Exempts up to $24,000 for those 65+
• Connecticut: Phases out for incomes under $100,000 (single) or $150,000 (joint)
• Minnesota: Offers partial exemptions
• Montana: Taxes based on federal guidelines
• New Mexico: Phasing out tax by 2026
• Rhode Island: Exempts benefits for incomes under $95,800 (single)
• Utah: Provides tax credits for lower earners
• Vermont: Exempts benefits for incomes under $50,000 (single) or $65,000 (joint)
• West Virginia: Phasing out tax by 2026

If you live in one of these states, check local rules to see how much of your Social Security may be taxed.

4. Medicare Taxes & Income-Related Adjustments (IRMAA)

Medicare is funded through payroll taxes under FICA and SECA:
Employees: 1.45% of income (matched by employers)
Self-Employed: 2.9% tax
High-Income Earners: Extra 0.9% tax on wages above $200,000 (single) / $250,000 (joint)

Medicare IRMAA (Income-Related Monthly Adjustment Amount)

If your Modified Adjusted Gross Income (MAGI) is high, you’ll pay extra for Medicare Part B and Part D.

Medicare Part B 2025 IRMAA Premiums
$103,000 or less (single) / $206,000 or less (joint): $185/month
$103,001 – $129,000 (single) / $206,001 – $258,000 (joint): $261/month
$129,001 – $161,000 (single) / $258,001 – $322,000 (joint): $377/month
$161,001 – $193,000 (single) / $322,001 – $386,000 (joint): $493/month
Above $500,000 (single) / $750,000 (joint): $594/month

Medicare Part D 2025 IRMAA Surcharge
$103,000 or less: No surcharge
Above $103,000: Additional $12 to $76 per month added to Part D premiums

Tip: If your income has dropped due to retirement, you can request a reassessment of your IRMAA through Form SSA-44.

5. Health Savings Accounts (HSAs) & Taxes

HSAs offer tax benefits for saving on medical expenses.
Contributions are tax-deductible, funds grow tax-free, and withdrawals for medical expenses are not taxed.

HSA Contribution Limits for 2025

• Single: $4,300
• Family: $8,550
• Catch-up (age 55+): Extra $1,000

Important: Once enrolled in Medicare, you can no longer contribute to an HSA, but you can spend existing funds.

6. How to Reduce Taxes on Social Security & Medicare

Delay Social Security: Waiting until 70 boosts benefits and reduces early taxation.
Roth Conversions: Converting traditional IRA/401(k) funds to a Roth IRA spreads out taxes over lower-income years.
Withdraw strategically: Pull income from Roth accounts or brokerage accounts before touching Social Security.
Monitor Medicare IRMAA: Keep MAGI below thresholds to avoid higher Medicare premiums.

Final Thoughts: Plan Ahead to Minimize Taxes

Taxes on Social Security and Medicare can significantly impact retirement income, but with smart planning, you can reduce the burden. By understanding how FICA, SECA, IRMAA, and state tax laws work, you’ll be in a better position to maximize your retirement benefits.

Have questions about Social Security or Medicare taxes? Drop them in the comments! Let’s discuss the best ways to keep more of your retirement income.