Changes are expected in the Social Security program. Every year, little changes are made to keep the program relevant and accessible to beneficiaries; nevertheless, the presidential election in 2025 may result in a change that few anticipate.
During his campaign, President-Elect Donald Trump promised to eliminate the federal income tax on Social Security retirement payouts if elected. As a campaign vow, this sounded fantastic to his new supporters, especially since retirees make up a sizable portion of his base, but if carried out, the same people screaming for tax cuts will be the ones most impacted.
The Cost of Eliminating the Federal Income Tax from Social Security
To determine whether this is a good concept, we must first perform some mathematical calculations. The Social Security Administration (SSA) reported that almost 47.3 million persons received retirement benefits in 2021, with an average annual payout of $21,228.The entire payments amount to somewhat more than $1 trillion.
If we assume some tax assumptions, such as that 75% of the benefits (about $753 billion) were taxed and that the amount was divided evenly between two groups: one with 50% taxable benefits and another with 85%. Let us also assume that the 50% group pays 12% tax and the 85% group pays 24%.
Calculating the statistics, the 50% group would save approximately $45.18 billion in taxes, while the 85% group would save approximately $90.35 billion. This amounts to around $135.53 billion in tax savings. This represents around 2.7% of overall federal revenue. If Social Security benefits were not taxed, the government’s revenue would decrease by that proportion.
While there are a lot of assumptions, the data appear to support the tax exemption in this scenario. If this were to become a reality, the extra money that retirees would get could change their lives. It would stimulate the economy and allow for more expenditure on non-essential products.
Unfortunately, many retirees rely solely on Social Security income due to insufficient savings or no private assets. Surprisingly, Social Security benefits are not taxed separately; instead, they are included in combined income. The SSA reports that only around 40% of Social Security recipients are required to pay federal income taxes on their payments, which is significantly lower than previously estimated.
Your “combined income” is derived by adding your adjusted gross income, nontaxable interest (such as bond interest), and ½ of your Social Security payments. Once all of this is summed up, you can determine whether or not your income will be taxed.
Individuals filing a federal tax return with a combined income between $25,000 and $34,000 may be required to pay income tax on up to 50% of their benefits. If it exceeds $34,000, up to 85% of your benefits could be taxed.
If you file a joint return with your spouse and have a combined income between $32,000 and $44,000, you may need to pay income tax on up to 50% of your benefits. If it exceeds $44,000, up to 85% of your benefits could be taxed.
Since 60% of Americans do not have to pay federal income taxes on their Social Security income, most are living solely on their benefits or under $25,000 per year ($32,000 for couples filing jointly). This tax cut would only benefit wealthy taxpayers who already have enough income.
