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Retiring without Social Security today would be challenging, especially if you haven’t been able to save much during your career. But retiring on Social Security alone is also difficult. Though cost-of-living adjustments (COLAs) increase benefits in most years, expenses often rise faster. Some seniors find themselves losing a cut of their benefits to the IRS, too.
President Trump vowed to eliminate Social Security benefit taxes during his 2024 campaign. Now, Representative Thomas Massie (R-Ky.) has introduced a bill to do just that.
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It’s far from a done deal, but if it passes, it could save the typical senior household thousands per year in taxes. However, it also has a downside that could hurt retirees a few years down the road.
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How Social Security benefit taxes work
The government created Social Security benefit taxes in the mid-1980s. At first, it only taxed up to 50% of benefits, and many retirees had incomes low enough that they didn’t lose any of their checks.
A decade after the first benefit tax took effect, Congress added a second tax tier. Since then, those with provisional incomes over certain thresholds could owe taxes on up to 85% of their benefits. “Provisional income” is defined as adjusted gross income (AGI), plus any nontaxable interest from municipal bonds and half of any annual Social Security benefit.
The following table shows how your provisional income and marital status affect the percentage of your Social Security benefits the IRS could tax:
|
Marital Status |
0% of Benefits Taxable if Provisional Income Is Under: |
Up to 50% of Benefits Taxable if Provisional Income Is Between: |
Up to 85% of Benefits Taxable if Provisional Income Exceeds: |
|---|---|---|---|
|
Single |
$25,000 |
$25,000 and $34,000 |
$34,000 |
|
Married |
$32,000 |
$32,000 and $44,000 |
$44,000 |
Source: Social Security Administration.
You’d expect these numbers to be indexed for inflation, but they’re not. So as average incomes and Social Security benefits continue to rise, more and more seniors find themselves giving a share of their checks back to the IRS.
To be clear, you’ll pay ordinary income tax on the taxable percentage of your benefits, so it’s not as if you’ll lose up to 85% of your checks. Even the wealthiest Americans would only pay 37% tax on the portion of benefits they’re taxed on. But the tax is still hard on many middle-income seniors, particularly those who lack personal savings to supplement their checks.
Eliminating this tax would save the average senior household $3,082 per year
Eliminating the Social Security benefit tax would enable retirees to hang onto more of their checks, and each household’s savings would vary. The typical senior household would see its tax bill drop from $7,022 to $3,940 — a savings of $3,082 — if the government did away with the benefit tax in 2025, according to The Senior Citizens League (TSCL).
But low-income households may not notice any change. Under the current law, low-income seniors below the thresholds don’t owe Social Security benefit taxes, so they wouldn’t notice any immediate gain by eliminating it. However, it’s possible that under current law, some of these low-income households could owe benefit taxes in the future if their income rises enough. Eliminating the benefit tax would avoid this future problem.
There really isn’t anything negative to say about this plan in the short term, but the long-term implications are more complicated. Social Security benefit taxes are one of just three of the program’s funding sources. The other two are Social Security payroll tax and interest earned on the program’s trust funds.
Social Security has been spending more than it’s taken in for years now and relied upon the trust funds to make up the difference. But that can’t last forever. The latest Trustees Report indicates that the trust funds will be depleted by 2035. After this, Social Security would only be able to pay out 83% of scheduled benefits going forward unless the government intervenes.
Eliminating Social Security benefit taxes would only accelerate this deadline. This isn’t to say it’s impossible to end benefit taxes and keep Social Security solvent for future generations, but it makes the fix a little more difficult. The government may have to increase the payroll-tax rate or reduce benefits for some or all seniors to pull this off.
No one knows what Congress will do regarding Social Security’s future, but this issue will likely get more attention as the insolvency date approaches. This will be especially true if President Trump succeeds in his plan to end Social Security benefit taxes.
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