There are projected changes to the Social Security program. Every year, tiny tweaks are made to help keep the program relevant and accessible to recipients, but in 2025, due to the presidential election, there may be a shift that few foresee.
President-Elect Trump stated during his campaign that if elected, he would repeal the federal income tax on Social Security retirement benefits. As a campaign pledge, this sounded incredibly good to his new supporters, especially since pensioners make up a major section of his base, but if executed, the same individuals shouting for tax elimination will be the ones most affected.
The Cost of Removing the Federal Income Tax from Social Security
To determine whether this is a good concept, we must first perform some mathematical calculations. According to Social Security Administration (SSA) figures, almost 47.3 million persons received Social Security retirement benefits as of the end of 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. To put it in context, that is approximately 2.7% of total federal revenue. So, if Social Security payouts were not taxed, the government’s revenue would be reduced 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.
However, the sad reality is that most seniors do not have enough retirement savings, and many have no private assets at all, leaving them nearly completely reliant on Social Security income. People may be surprised to learn that Social Security benefits are not taxed on their own; rather, they are taxed as part of combined income. According to the SSA, only around 40% of Social Security recipients are required to pay federal income taxes on their payments, which is significantly lower than the prior math showed.
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.
If you file a federal tax return as an individual and your total income falls between $25,000 and $34,000, you may be required to pay income tax on up to half of your 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 of $32,000 to $44,000, you may be required 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.
Because approximately 60% of Americans do not have to pay federal income taxes on their Social Security income, this means that the majority of them live solely on their Social Security benefits or earn less than $25,000 per year ($32,000 for couples filing jointly). Given that this is the case, only the wealthier taxpayers, who already do not require additional income, would benefit from this tax cut.
