Don't Mess With Taxes

Retirement can be more enjoyable when you don't have to worry about money or, if some lawmakers get their way, taxes on Social Security benefits. (Photo by RDNE Stock project)
       

Lots of folks are paying more than usual attention to Social Security of late.

We’re wondering just what Elon Musk’s Department of Government Efficiency (DOGE) minions are doing as they poke around the federal system that provides financial support to millions of older and medically disabled people.

We’re also curious as to when Donald Trump might follow through on his campaign promise to end taxation of Social Security benefits.

The disconcerting answer to the first question is, we don’t really know.

But we have a clearer idea about eliminating federal income tax on a portion of Social Security benefits that many recipients pay. That’s not likely to happen.

It doesn’t mean some lawmakers aren’t trying. Rep. Thomas Massie (R-Kentucky) earlier this month reintroduced the Senior Citizens Tax Elimination Act (H.R. 1040). So far, it has 32 cosponsors.

The bill originally was introduced in 2003 by then-Rep. Ron Paul (R-Texas). Massie was ahead of Trump in supporting the end of Social Security benefits, having re-introduced the bill each Congress since he took office in 2012.

The Senior Citizens Tax Elimination Act’s current incarnation would amend the Internal Revenue Code to terminate the inclusion of tier I railroad retirement benefits and Social Security benefits in an individual’s gross income.

The bill calls for the end of the tax in “any taxable year beginning after the date of the enactment” of the termination subsection.

In plain English, the tax would end in the year after it’s signed into law. So, if it passes the House and Senate and is signed into law this year, Social Security recipients wouldn’t owe any tax on those benefits starting in 2026.

Cost of the Social Security tax break: The effort to end this tax has, as noted by the reference to the late Ron Paul (yes, he was the father of current Kentucky GOP Sen. Rand Paul, who was in the past a fan of another 2024 campaign promise, tax-free gratuities), has been going on for decades.

So why hasn’t it happened yet? The same reason that so many tax proposals pass or fail. Money.

Although recently reiterated his support for eliminating the tax, money could doom the campaign promise.

The immediate concern is the loss of the tax revenue and its adverse effects on not only Uncle Sam's overall bottom line, but also the longevity of federal retirement system. When Trump made his promise on the campaign trail last fall, numbers crunchers went to work.

The math from the Committee for a Responsible Federal Budget (CRFB), a Washington, D.C.-based nonpartisan, non-profit fiscal policy analysis organization, showed that the end of Social Security tax, along with Trump's pledge to end taxes on tips, would —

• Increase Social Security’s ten-year cash shortfall by $2.3 trillion through fiscal year 2035;
• Advance Social Security’s projected insolvency by three years, from fiscal year 2034 to fiscal year 2031, hastening the insolvency timeline by one-third;
• Lead to a 33 percent across-the-board benefit cut in 2035, up from the 23 percent CBO projects under current law;.
• Increase Social Security’s annual shortfall by roughly 50 percent in FY 2035, from 3.6 to 4 percent of payroll; and.
• Require the equivalent of reducing current law benefits by about one-third or increasing revenue by about one-half to restore 75-year solvency.

Newer numbers still dire: The CRFB numbers were issued back in October 2024. The dollar signs haven’t improved since the election.

A new analysis by the Penn Wharton Budget Model, a nonpartisan, research-based project at the University of Pennsylvania, says ending taxes on Social Security benefits could reduce U.S. government revenues by $1.5 trillion over 10 years. It also could increase the federal debt by 7 percent by 2054.

So unless DOGE can come up with enough savings to offset that, and many examinations of its efforts so far are raising questions about revenue recapture claims, the end of taxing Social Security benefits is likely to again fail.

Plus, there’s the political perception factor. Taxpayers who rely primarily on Social Security benefits to cover their living expenses usually don’t owe tax. Income tax collection on the retirement benefits kicks in when the recipient gets additional funds from other sources, such as investments and pensions or traditional individual retirement account distributions.

In fact, notes the Wharton report, ending the current tax on Social Security benefits would help high-income households the most. “Some high-income households would gain more than $100,000 in remaining lifetime welfare from the policy change, but those under age 30 would be worse off, with newborn households losing about $10,000 in lifetime welfare,” according to the report summary.

Such advantages for wealthier Americans is not a good look for self-proclaimed populists. Add to that the expected amount the tax break could add to the federal debt, and the effort could lose the GOP faction that’s insistent on reducing Uncle Sam’s borrowing.

Current Social Security taxation law: While we wait to see if the tax on Social Security benefits is ended or even adjusted a bit, here’s the law that current recipients face.

Before 1983, Social Security benefits were tax free. That changed with enactment that year of the Social Security Amendments, which introduced taxation of the retirement payments for the first time. A decade later, the Omnibus Budget Reconciliation Act of 1993 gave us second tier of taxation.

Currently, the share of an individual’s Social Security benefits subject to taxation is based on the person’s combined income.

Single seniors with combined income between $25,000 and $34,000 — $32,000 to $44,000 for older married joint filers — are taxed at ordinary tax rates (which range from 10 percent to 35 percent this year) on up to 50 percent of their Social Security benefits.

Older individuals whose combined income exceeds $34,000 — $44,000 for jointly filing seniors — are taxed on up to 85 percent of their benefits.

But here’s the real kicker. These income limits are not indexed for inflation. As incomes rise due to inflation, more people may find they must pay income tax on their Social Security benefits.

And there’s one more bit of bad news for some Social Security recipients. Nine states join Uncle Sam in taxing at least some Social Security benefits

You can read more on the current federal taxation of Social Security benefits in my post, Some Social Security recipients owe tax on federal retirement benefits.

You also might find these Social Security items of interest:

• Social Security taxable wage base goes to $176,100 in 2025
• House bill would increase earnings limit for some working Social Security beneficiaries
• Bill to save Social Security would increase payroll tax wage base, change annual COLA calculation

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