Trump Wants To Eliminate Social Security Taxes: How Much Retirees Could Save Annually
Retirees are often surprised to learn that they might have to pay federal income tax on their Social Security benefits. The tax kicks in once your income reaches certain thresholds, and it can actually bump you up to a higher tax rate, according to T. Rowe Price. In fact, individuals in the 22% tax bracket could wind up with a whopping 40.7% marginal tax rate inclusive of the tax on benefits.
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Former President Donald Trump has made several public statements pledging to repeal that tax if he is elected president in November. If you’re one of the 40% of American retirees who currently pays tax on your Social Security benefits, you could be in for a tax cut if Trump wins and successfully pushes the repeal through Congress.
So, how much would the repeal save retirees?
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Estimated Savings From a Similar Initiative
In January, House Democrats introduced a bill called the You Earned It, You Keep It Act, which would eliminate tax on Social Security benefits. The nonpartisan Senior Citizens League estimated that the repeal would have saved the typical senior citizen $497.52 in 2022, the most recent year for which Census income information is available. All else being equal, that amounts to about $527 in 2024 dollars after adjusting for inflation.
Your own savings would depend on your income, your Social Security benefit amount and how much of your benefit currently is subject to tax.
The thresholds are based on combined income, which the Social Security Administration (SSA) defines as adjusted gross income plus tax-exempt interest and one half of your Social Security benefits.
Retirees with combined income of $25,000 ($32,000 for joint filers) pay tax on 50% of their Social Security benefits, with the rest being untaxed. Retirees with more than $34,000 in combined income ($44,000 for joint filers) pay tax on 85% of their benefits.
As a result, a retiree receiving the average monthly benefit of $1,872.09 — whose combined income puts them above the thresholds — pays federal income tax on anywhere from $11,233 (50%) to $19,095 (85%) of their yearly benefits.
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Estimate Your Savings
Information from your 2023 federal tax return can give you a rough estimate of how much you might save if you didn’t have to pay tax on Social Security.
Tax-exempt interest — one element of the combined income used to calculate the tax — appears on Line 2a of your tax return. The taxable amount of your Social Security benefit appears on Line 6b. Subtract both of those amounts from the adjusted gross income (AGI) on Line 11.
Next, subtract the amount shown on Line 14. This is your AGI without taxable Social Security and tax-exempt interest.
You can use IRS tax rates and brackets, located here, to see how much tax you’d have owed on that lesser amount. Then calculate your savings by subtracting that amount from the tax you paid.
The Savings Might Be Temporary
The taxes retirees pay on Social Security benefits help to fund the program. The Social Security trust fund that pays a portion of the benefits is headed for insolvency in 2033, according to the trustees’ latest estimate. After that, payroll withholding would fund only about 79% of current benefits.
Eliminating the tax on Social Security could deplete the trust fund one year sooner and add an additional 4% to the shortfall, according to the Committee for a Responsible Federal Budget. And that, in turn, could reduce retirees’ Social Security benefits by 25%.
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