There are expected changes to the Social Security program. Every year it goes through minor adjustments to help keep the program relevant and accessible to beneficiaries, but this 2025 because of the presidential election, there may be a change not many are expecting.
President-Elect Trump mentioned when campaigning that, if he won, he would eliminate the federal income tax on Social Security retirement benefits. As a campaign promise this sounded really good to his new constituents, especially since retirees make up a large portion of his base, but this might not be a good ide if implemented, and the same people clamoring for the abolition of the taxes will the ones impacted the most.
The Cost of Eliminating the Federal Income Tax from Social Security
To know if this is a good idea we need to start by doing some math. At the end of 2021, nearly 47.3 million people were getting Social Security retirement benefits, with an average payout of $21,228 per year according to data from the Social Security Administration (SSA). It adds up to a little over $1 trillion in total payments.
If we make some assumptions about taxes, like that 75% of those benefits were taxed (about $753 billion) and that the amount is split evenly between two groups: one where 50% of their benefits are taxable and another where 85% are. Let’s also assume the 50% group falls into a 12% tax bracket and the 85% group is taxed at 24%.
Crunching the numbers, the 50% group would save around $45.18 billion in taxes, while the 85% group would save about $90.35 billion. Together, that’s roughly $135.53 billion in tax savings. To put it in perspective, that’s about 2.7% of total federal revenue. So, if Social Security benefits weren’t taxed, the government’s revenue would shrink by that percentage.
While these are a lot of assumptions, the numbers seem to agree with the tax exemption in this scenario. The extra money that this would put in the hands of retires could be lifechanging if this were the reality. It would boost the economy and allow for more spending on non necessity items.
But the sad reality is that most retirees do not have enough savings for retirement, and many have no private savings whatsoever, meaning they almost fully rely on Social Security benefits. This might surprise people, but Social Security benefits are not taxed on their own, what is taxed is called combined income. According to the SSA only about 40% of people who get Social Security must pay federal income taxes on their benefits, which is a lot less than the previous math suggested.
Your “combined income” is calculated by adding your adjusted gross income you’re your nontaxable interest (like interest form bonds) plus ½ of your Social Security benefits. Once that is all added, you can see if your income will be taxed.
If you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If it is more than $34,000, up to 85% of your benefits may be taxable.
If you file a joint return, and you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If it is more than $44,000, up to 85% of your benefits may be taxable.
Since about 60% of Americans do not have to pay federal income taxes on their Social Security income, this means most of them are living just solely off their Social Security benefits or under $25,000 dollars a year ($32,000 for couples filing jointly) and considering that these are the majority, only the wealthier taxpayers, who already do not need more income, would benefit from this particular tax cut.