President Donald Trump’s plan to eliminate federal taxes on Social Security benefits sounds simple: cut taxes so older adults keep more of their money. However, the plan is controversial because of its potential impact on the Social Security Trust Fund and the primary beneficiaries of the tax cut.
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While Trump framed his initiative as tax relief for retirees, the benefits disproportionately favor higher-income retirees.
So, who would benefit the most from Trump’s Social Security tax plan?
Social Security benefits are taxed based on income.
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Individuals earning below $25,000 ($32,000 for joint filers) pay no tax.
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Those earning between $25,000 and $34,000 ($32,000 to $44,000 for joint filers) pay taxes on up to 50% of benefits.
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Retirees earning above these thresholds pay taxes on up to 85% of benefits.
Revenue from these taxes helps sustain the Social Security Trust Fund.
“Currently, a retired lawyer, for instance, who is earning an income above the thresholds will pay progressively higher taxes on their Social Security benefits and essentially loses benefits,” said Wayne Winegarden, an economist at Pacific Research Institute. “Trump wants to stop taxing this income.”
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Trump’s plan would primarily benefit high-income retirees.
“Given this progressive tax structure, removing taxation of income will benefit beneficiaries with incomes above $25,000 ($32,000 for joint filers),” Winegarden said. “The benefit from the policy grows with income up to the cap.”
Winegarden explained, “If you stopped taxing Social Security benefits, that would mean you would stop taxing beneficiaries who earn more–the high-paid lawyer who works part-time in their retirement. Therefore, these higher-income earners will benefit.”
Higher-income retirees with revenue from pensions, investments, and part-time work would also gain. Those withdrawing funds from IRAs or 401(k)s would see indirect benefits, as taxable withdrawals can push middle-class retirees above taxation thresholds.
“There are lots of people who would pay less in taxes if Social Security income were no longer taxed,” Winegarden said. “These people would all have higher incomes, though.”
Lower-income retirees, who already pay no taxes on their benefits, wouldn’t see a direct gain.
Middle-class retirees earning $25,000 to $70,000 might see some tax relief, but the long-term risks to Social Security’s future could offset these benefits.
Kevin Walton, a registered Social Security analyst, said that eliminating taxes on benefits would remove $50 billion annually from Social Security.
“We just had the Social Security Fairness Act passed, which will further deplete the trust fund by another $190 billion,” Walton said. “The trust fund is hemorrhaging.”
Winegarden emphasized the financial risks of Trump’s proposal.
“Taxing Social Security benefits is a way of reducing benefits to higher-income households, which is why it was originally implemented,” he said.
Without tax revenue flowing back into the fund, depletion could lead to benefit cuts of up to 33% in the coming years.
“This could increase the risk that taxpayers, including lower- and middle-income taxpayers, could cease receiving Social Security benefits,” said Mark Luscombe, Principal Analyst for Wolters Kluwer’s Tax and Accounting Division North America.
Luscombe also said there are Congressional Social Security tax proposals that would increase the income threshold for Social Security withholding. These proposals are designed to help keep the Social Security Trust from becoming exhausted and would primarily benefit higher-income retirees.
Chris Orestis, a retirement expert and president of Retirement Genius, said that Trump’s plan is “a tax break for the rich paid for by workers.”
“In the short term, this tax break only benefits higher-income beneficiaries, penalizes workers not yet on the program, and does nothing for lower-income beneficiaries,” Orestis said. “In the long run, it hurts future beneficiaries of all stripes, but particularly lower-income ones.”
Older adults and future retirees should take proactive steps to secure their financial future.
“The best thing you can do now is increase your retirement savings, so you do not have to rely as heavily on your Social Security benefits,” said Krisstin Petersmarck, a National Social Security Advisor and investment advisor.
Brent Matthew, a financial advisor and founder of Scottsdale Wealth Advisory, said retirees should consider how the proposed tax changes might affect their Medicare premiums, particularly those that are income-based.
“A reduction in taxable Social Security income might also result in lower Medicare premiums,” Matthew said. “However, this is also an example of the broad impact any changes in tax law and benefits structure can have.”
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