Trump’s promise to end Social Security taxes may face obstacles

On November 14, 2024By Littum

Every retiree in the country, I’d imagine, heard President-elect Donald Trump’s promise to eliminate taxes on Social Security benefits, so much so that they might one day soon be sitting at breakfast wondering if they should rush to reduce their tax withholding for 2025.

But don’t put it on your to-do list just yet.

We’re talking about pretty significant obstacles to such a change happening as early as next year, if ever.

“Probably the earliest chance that Social Security benefits could be considered by Congress would be if it is included in a major tax bill introduced in 2025 during budget vote procedures,” said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois .

Congress can use the special reconciliation process in some cases to fast-track high-priority tax, spending and debt-limiting legislation — and avoid a filibuster in the Senate.

A long list of soon-to-disappear tax cuts will be a key concern for Congress next year because of the many individual provisions of the Tax Cuts and Jobs Act of 2017 — which was pushed through when Trump served as the 45th president of the United States. states — will expire at the end of 2025.

Will Social Security benefits be tax-free by 2025?

Luscombe and other tax professionals caution that retirees and others should not expect a quick change in potential taxes on some Social Security benefits.

Luscombe said eliminating Social Security benefits taxes through the budget reconciliation process would prove quite a challenge because the loss of revenue would be significant and would need to be offset.

“With increasing concerns about deficits and some potential opposition among Republicans to Trump’s main proposed revenue raiser, tariffs, it may be difficult to get all of Trump’s proposed tax cuts included,” Luscombe said.

Or if they’re all included, Luscombe said, those tax breaks could be subject to expiration after 10 years, as was done in the Tax Cuts and Jobs Act.

“So it’s possible that the elimination of a tax on Social Security benefits could be effective in 2025, but it would have to overcome some of these hurdles for that to happen,” Luscombe said.

Anna Taylor, deputy head of the tax policy group at Deloitte in Washington, DC, maintains that the president-elect’s proposal to get rid of taxes on Social Security benefits would not work in a reconciliation package.

If part of a separate bill, there is still a 60-vote threshold to overcome a filibuster in the Senate, which could create other hurdles. As a result, changes involving taxation of Social Security benefits would require at least 60 Senate votes, including some Democratic support.

“It’s something that could have some Democratic support in the right scenario, but it would depend on what the context was,” Taylor said in a media briefing Tuesday.

Many people do not pay Social Security tax now

It is important to note here that not everyone pays tax on their social security benefits. For example, if such a change were to occur, it would generate no additional savings for a single retiree whose total income is about $24,000 a year or less and pays no tax on benefits now.

About 40% of the population who receive social security must pay income tax on their benefits, according to a report issued by the Social Security Administration.

Unfortunately, it doesn’t take much extra income to be hit with some taxes because income thresholds that trigger the Social Security tax don’t adjust for inflation.

For single files, the threshold is when you will have to pay tax of up to 50% of your Social Security benefits apply when your total income is between $25,000 and $34,000 per year. When the total income is higher, up to 85% of the benefits can be taxable.

Couples filing a joint return face taxes of up to 50% of their Social Security benefits if their combined income is between $32,000 and $44,000. If the couple’s combined income is higher than that, up to 85% of the benefits will be taxable.

The combined income is your adjusted gross income plus nontaxable interest, such as interest on certain bonds, plus half of your Social Security benefits received that year.

As a result, a person who works while collecting Social Security benefits will have to take into account their earnings from a job. The same is true for someone who is retired and takes taxable withdrawals from traditional 401(k) plans.

Eliminating taxes on Social Security benefits can be a tough sell

Removing the complicated tax headache for retirees sounds like a good idea to many. But ending or lowering taxes on Social Security benefits has been proposed — and gone nowhere — a few times before now.

The “You earned it, you keep it” was introduced by Minnesota Democrat US Rep Angie Craig in 2022, for example, as a way to repeal federal taxes on Social Security benefits for retirees. That tax cut was to be paid for by raising the cap on people earning more than $250,000 annually and requiring those earners to pay more Social Security taxes. The bill was too introduced in 2024.

Under such a plan, these higher earners would pay a 6.2% payroll tax on nearly $74,000 more of their wages. Their employers would face the same type of change.

Currently, the Social Security payroll tax, which applies to both employees and employers, is set to rise to $176,100 in 2025 — up from $168,600 in 2024. The increase, based on inflation, was announced in October by the Internal Revenue Service.

Some experts would prefer to see income tax limits that apply to Social Security benefits indexed for inflation so people could earn more in retirement without taking a tax hit.

Taxes paid on Social Security benefits go back into the Social Security system, not the general fund of the U.S. Treasury. Social Security recipients, according to Social Security, not fully fund their benefits through their payroll taxes.

Trust funds are used to support payments to Social Security recipients and are expected to become insolvent in 2035, a year later than estimated last year by the Social Security Board of Trustees, based on an annual report filed in May.

Social Security pays out more each year to beneficiaries than it collects each year in revenue — so cutting taxes on benefits without raising money elsewhere could hurt the program overall. In 2023, 51 billion dollars for the combined funds was raised through the taxation of benefits.

We’re bound to see all sorts of confusing headlines related to tax planning for 2025. But right now, it’s hard to make many moves — including eliminating or reducing — your 2025 Social Security withholding.

We just don’t know what’s likely to happen and when, even with the GOP expected to control the House. The GOP has a narrow majority in the Senate.

Some buzz about taxing benefits at the state level is not new

Seniors can spot all sorts of confusing headlines online, such as one that said “41 States That Will not tax social benefits in 2025.” A Redford Township retiree told me last week that the headline, which seemed to imply a big change ahead, made her consider stopping withholding taxes from her Social Security payments each month.

But nothing changes in Michigan — which is one of those 41 states — in 2025 with respect to taxes on Social Security benefits on state tax returns.

“Social Security is generally tax deductible for Michigan taxpayers, so there is no need to withhold any state income tax on these payments,” said Ron Leix, a spokesman for the Michigan Treasury.

“Social Security benefits have been potentially included in federal adjusted gross income (AGI) since 1984, and Michigan taxpayers have been able to claim a deduction for Social Security in AGI ever since,” Leix said.

Many Michigan retirees still withhold federal income taxes each month from Social Security benefits to address potential tax liabilities that will arise when they file their federal income tax return each year.

An individual can start, change, or stop withholding at any time by calling Social Security at 800-772-1213. Representatives are available between 8.00 and 19.00 weekdays. Or someone can download and print the W-4V form and fax or mail it to their local Social Security office.

Before making any rash moves, however, it may be wise to run this strategy by your tax professional.

Contact personal finance columnist Susan Tompor: [email protected]. Follow her on X (Twitter) @tomboy.