You pay Social Security taxes throughout your career, so it can feel a little unfair if you have to pay taxes on your benefits in retirement. But that's the reality an increasing number of retirees face. It's a major pain point, particularly for those who don't have a lot of personal savings to supplement their checks.
President Trump's campaign promise to eliminate Social Security benefit taxes struck a chord with a lot of retirees, and it may soon become a reality. Rep. Thomas Massie (R-Ky.) recently introduced the Senior Citizens Tax Elimination Act to the House, which would exempt Social Security benefits from federal taxation. We don't yet know if it will pass, but there's already some data about the potential tax savings floating around -- and it might surprise you.
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How Social Security benefit taxes work
The IRS began taxing Social Security benefits in 1984 and added a second tax tier a decade later. Since then, the Social Security benefit tax formula has remained the same. The government may tax a certain portion of your Social Security benefits based on your marital status and provisional income, defined as your adjusted gross income (AGI), plus any nontaxable interest you may have if you own municipal bonds, and half your annual Social Security benefits.
The table below gives the current Social Security benefit taxation tiers:
|
Marital Status |
0% of Benefits Taxable If Provisional Income Is Below: |
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.
The tier you fall into determines the percentage of your Social Security benefits that are subject to ordinary income tax. In the worst-case scenario, you could owe 37% in taxes on up to 85% of your benefits. Most people pay far less than this, but these taxes can still be a burden to those living on low fixed incomes.
The benefits of eliminating these taxes vary by income level
As you may have already realized from the table above, the lowest-income households wouldn't see any immediate benefit from the federal government eliminating Social Security benefit taxes because they're not paying them. However, costs and average Social Security checks continue to rise, pushing more people's benefits into a taxable range every year. So, eliminating benefit taxes could save some of these lower earners from future taxes they'd owe if the current law remains in effect.
It should come as no surprise that the wealthy stand to see the greatest gains if the IRS does away with Social Security benefit taxes. They pay the lion's share of Social Security benefit taxes in the first place. Analysis from the University of Pennsylvania's Wharton Budget Model group found that the top 0.1% would save an average of $2,450 in taxes in 2025 if the government stopped taxing Social Security benefits. Their annual savings would rise to $5,080 by 2054.
Meanwhile, average Americans -- those who fall in the 40% to 60% income group -- would only save about $340 in annual taxes in 2025 if Social Security benefit taxation ends. By 2054, their estimated savings would be $1,730 per year.
For those who fall in the 60% to 80% income group, annual savings would be $1,135 and $3,560 in 2025 and 2054, respectively. Those in the 80% to 90% income group would save $1,625 and $4,075, respectively.
However, middle- to upper-middle-class Americans actually stand to gain the most relative to their total available income. Most millionaires and billionaires in the 0.1% aren't going to notice any significant change in their quality of life from saving an extra $2,450 per year. But saving $1,135 to $1,625 could noticeably improve the lives of those living off more modest incomes.
The Penn Wharton study found that those in the 60% to 90% income groups will see a roughly 1% change in their after-tax income compared to virtually no change for the wealthiest Americans. Middle-income Americans would see a 0.5% change in after-tax income if the government eliminated benefit taxes.
One thing to bear in mind about all these numbers is that they apply to all members of an income group, regardless of their age. Those actually receiving and paying tax on Social Security benefits right now could see much larger and more immediate savings.
Long-term consequences are mixed
There are definite short-term benefits to getting rid of Social Security benefit taxes for average and wealthy Americans. However, the long-term consequences are harder to predict. Social Security benefit taxes are one of only three funding sources for the program. Eliminating it would put greater strain on Social Security, which is already facing a $23 trillion funding shortfall.
The program's trust funds are expected to be depleted in 2035 under current estimates. Unless the government finds a way to increase Social Security's funding before then, it would have to slash all Social Security benefits by 17% going forward. Cutting Social Security benefits would accelerate this deadline.
This isn't to say it's impossible to eliminate Social Security benefits and ensure its solvency for future generations. However, with less time until the trust fund depletion date, the government also has fewer options for how to reform the program.
