The Great Unretirement: Medicare, Social Security and Tax Implications

by Prof. Robert Bloink and Prof. William H. Byrnes

The so-called “Great Resignation” that occurred during the COVID-era was surprising on many different levels—but, in many cases, could be explained due to COVID-related health and safety issues. Now that those issues have largely stabilized, a new trend is emerging: “unretirement”. One study has found that as many as one in eight retirees between ages 65 and 85 plan to return to work during 2025. While returning to work can be beneficial for retirees and businesses alike, it’s critical that clients understand the tax and financial repercussions of returning to work before they decide to unretire. Social Security, Medicare and the client’s retirement income planning can all be impacted, so it’s incredibly valuable to explore the pros and cons of unretirement before making a decision.

Factors Driving the Unretirement Trend

Retired clients decide to return to the workplace for many different reasons. Some clients simply unretire because they need the money or are concerned about outliving their savings.

For others, the decision hinges on social and emotional factors. Many individuals find that they’re bored during retirement and miss the structure and social elements of being in the workplace. Some studies find that work helps people remain engaged and prevents cognitive decline.

Business owners, meanwhile, can benefit from talented and experienced workers returning to the workforce.

Social Security and Medicare

The client’s Social Security benefits may be impacted if they once again begin earning money. Social Security benefits can be reduced based on a complex “earnings test” for clients who started claiming Social Security benefits before reaching full retirement age (currently between age 66 and 67, depending on the client’s birthdate). Benefits are reduced for Social Security beneficiaries whose earnings exceed a certain threshold.

If the client’s income exceeds $23,400 (in 2025), Social Security benefits are reduced by $1 for every $2 above that threshold. In the year the client reaches full retirement age, Social Security benefits are reduced by $1 for every $3 above a $62,160 threshold. These reductions stop, however, in the month that the client reaches full retirement age.

Clients can also face increased taxes on Social Security when they begin earning income again. Up to 85% of the client’s Social Security benefits can be taxed, depending on the clients’ income levels. Up to 50% of benefits can be taxed when taxpayers file a federal return as single, head of household, or qualifying surviving spouse and their “combined income” is between $25,000 and $34,000 ($32,000 to $44,000 for joint returns). For taxpayers filing as single, head of household, or qualifying surviving spouse, up to 85% of Social Security benefits can be taxed if income exceeds $34,000 ($44,000 for joint returns).

Combined income is generally defined as one-half of the individual’s Social Security benefits plus modified adjusted gross income.

Clients do have the option of withdrawing a Social Security application if they claimed benefits before reaching full retirement age. They have 12 months from the date of benefit approval to withdraw their claim for benefits and repay any benefits they have received (including any benefits paid to the individual’s family and Medicare premiums). Once the client has reached full retirement age, they can voluntarily suspend their benefits and resume earning delayed retirement credits).

Of course, when a client’s income exceeds certain thresholds, they can also become subject to increased Medicare premiums. Increased premiums begin to apply once the client’s income exceeds $106,000 (a tiered structure applies and premiums increase depending on where the client’s income falls on the scale).

Retirement Plan Considerations

The good news is that returning to work can give the client’s retirement funds more time to grow. The SECURE Act 2.0 increased the age at which clients must begin taking retirement plan distributions to 73 (75 starting in 2033).

The law also increased the “catch-up contribution” limits to $10,000 ($11,250 as adjusted for inflation in 2025) for taxpayers aged 60, 61, 62 or 63 for tax years beginning after 2024 ($5,000 for simple plans). Since returning to work increases the client’s earnings, they may have more room to take advantage of these new limits.

Conclusion

Continuing to work can be beneficial on many different levels. It is, however, important to evaluate the financial consequences of the decision to return to work—otherwise, the client could face unpleasant surprises come tax time.

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