Big News for Retirees and Public Service Workers
If you’ve been impacted by the Windfall Elimination Provision (WEP) or Government Pension Offset (GPO), there’s good news: you may be getting a lump-sum payment from the Social Security Administration (SSA) — and it could be substantial.
On January 5, 2025, the Social Security Fairness Act was signed into law, eliminating both WEP and GPO retroactively to January 1, 2024. These provisions previously reduced or even eliminated Social Security benefits for over 3.2 million Americans — especially teachers, police officers, firefighters, federal employees, and others whose pensions came from non–Social Security-covered work.
Starting February 25, 2025, lump-sum payments began rolling out to affected individuals, covering back benefits from January 2024 through February 2025. Regular monthly benefits — recalculated without the WEP/GPO reductions — will start arriving in April 2025.
But before you celebrate, there’s one big question…
Are Lump-Sum Social Security Payments Taxable?
Short answer: It depends.
Social Security benefit taxation follows a unique (and frustratingly outdated) formula. Depending on your income, up to 85% of your benefits may be subject to federal tax.
Here’s how it breaks down:
Up to 50% of your benefits may be taxable if:
Your combined income is between:
Up to 85% may be taxable if:
Your combined income is between:
Combined income is defined as:
One-half of your Social Security benefits + all other income (including tax-exempt interest)
How to Reduce Taxes on Your Lump-Sum Payment
Here’s where tax planning gets smart — and potentially saves you money.
If you receive a lump-sum payment of Social Security benefits that applies to prior years (like the WEP/GPO back pay), you might be able to lower the taxable portion using the lump-sum election under IRC §86(e).
What’s a Lump-Sum Election?
Instead of taxing the entire payment in the current year, this election allows you to “spread” the lump sum across the years it actually covers — often lowering the total tax hit.
To make this election:
For example, if a taxpayer receives a lump sum in 2025 that covers benefits owed for both 2024 and 2025, the lump-sum election could allow him to reduce his 2025 taxable income by assigning part of the payment to the prior year — based on the income levels and thresholds for each.
Key Takeaways for Taxpayers and Advisors
Final Thoughts
For those finally receiving the Social Security benefits they were denied under WEP and GPO, this is a long-overdue correction. But with large lump-sum payments come tax complexities — and opportunities for smart planning.