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    • Trump’s promise to eliminate Social Security taxes could face obstacles
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    Trump’s promise to eliminate Social Security taxes could face obstacles

    Umito Posted on

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    I imagine every retiree in the country has heard President-elect Donald Trump’s promise to eliminate taxes on Social Security benefits, so much so that they may soon find themselves sitting at breakfast wondering if they should rush to reduce their withholding taxes for 2025.

    But don’t put this one on your bucket list just yet.

    We’re talking about pretty big hurdles for such a change to happen next year, if ever.

    “The first chance for Social Security benefits to be considered by Congress would likely be if they were included in a major tax bill introduced in 2025 as part of budget reconciliation procedures,” said Mark Luscombe, senior analyst at Wolters Kluwer Tax & Accounting in Riverwoods. , Illinois.

    Congress can use the special reconciliation process in some cases to expedite high-priority tax, spending and debt limitation legislation – and avoid a filibuster in the Senate.

    A long list of tax breaks that will soon disappear will be a major concern for Congress next year, as the many individual provisions of the Tax Cuts and Jobs Act of 2017 – which was passed when Trump was the 45th President of the United States – expires at the end of 2025.

    Will Social Security benefits be tax-exempt in 2025?

    Luscombe and other tax experts warn that retirees and others shouldn’t expect a quick change regarding potential taxes on some Social Security benefits.

    Luscombe said eliminating taxes on Social Security benefits through the budget reconciliation process would prove to be a real challenge because the loss of revenue would be substantial and would need to be compensated.

    “With growing concern over deficits and some potential opposition among Republicans to the main revenue increase proposed by Trump, namely tariffs, it may be difficult to include all of Trump’s proposed tax breaks,” 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 eliminating a tax on Social Security benefits could be effective by 2025, but some of these hurdles would have to be overcome for that to happen,” Luscombe said.

    Anna Taylor, deputy leader of the tax policy group at Deloitte in Washington, D.C., maintains that the president-elect’s proposal to eliminate taxes on Social Security benefits would not work under a reconciliation agenda.

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

    “This is something that could get some Democratic support in the right scenario, but it would depend on the context,” Taylor said during a press briefing Tuesday.

    More: Social Security’s cost-of-living adjustment for 2025 gets a 2.5% increase – but many aren’t excited

    More: Social Security Chief Visits Detroit, Dispels Myths, Laments Staffing Levels, and More

    Many people no longer pay taxes on Social Security benefits now

    It’s critical to note here that not everyone pays taxes on their Social Security benefits. If such a change occurred, for example, it would generate no additional savings for a single retiree whose combined income is about $24,000 a year or less and who does not currently pay tax on benefits.

    About 40% of people those who receive Social Security must pay taxes 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 taxes, because the income thresholds that trigger the tax on Social Security benefits don’t adjust for inflation.

    For single filers, the threshold from which you must pay taxes up to 50% of your Social Security benefits applies when your combined income is between $25,000 and $34,000 per year. Once combined income is higher, up to 85% of benefits may be taxable.

    Couples filing jointly are taxed 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 this amount, up to 85% of the benefits would be taxable.

    Combined income is your adjusted gross income, plus tax-free interest, such as interest on certain bonds, plus half of your Social Security benefits received that year.

    Accordingly, a person who works while receiving Social Security benefits should take their professional income into account. The same is true for a retiree who takes taxable withdrawals from traditional 401(k) plans.

    Removing Taxes on Social Security Benefits May Be Tough to Convince

    Eliminating the complicated tax headache for retirees seems like a great idea to many. But eliminating or reducing taxes on Social Security benefits has been proposed – unsuccessfully – several times before.

    THE “You earned it, you keep it in action” was introduced by Minnesota Democratic U.S. Rep. Angie Craig in 2022, for example, as a way to repeal federal taxes on retiree Social Security benefits. This tax cut was to be financed by raising the cap for people earning more than $250,000 a year and requiring more Social Security taxes to be paid by those earners. The invoice was also introduced in 2024.

    Under such a plan, these highest-earning employees would pay a 6.2 percent 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 cap that applies to both employees and employers is expected to increase to $176,100 in 2025, from $168,600 in 2024. The increase, based on inflation, has summer announced in October by the Internal Revenue Service.

    Some experts would prefer that the income tax thresholds for Social Security benefits be indexed to inflation so that people can earn more in retirement without facing a tax burden.

    Taxes paid on Social Security benefits go back to the Social Security system and not to the U.S. Treasury’s general fund. Social Security beneficiaries, according to Social Security, does not fully finance their benefits through their social charges.

    The trust funds are used to consolidate payments to Social Security beneficiaries and they are expected to become insolvent in 2035, a year later than last year’s estimate by the Social Security Board of Trustees, based of an annual report filed in May.

    Social Security pays out more to recipients each year than it takes in each year in revenue — so cutting taxes on benefits without raising money elsewhere could hurt the program as a whole. In 2023, $51 billion The combined trust funds were raised through tax benefits.

    We’re bound to see all kinds of confusing headlines regarding tax planning for 2025. But right now, it’s difficult to take many actions – including eliminating or reducing – your income tax withholdings. Social Security for 2025.

    We simply don’t know what is likely to happen and when, even though the Republican Party should control the House. The GOP has a slim majority in the Senate.

    Buzz about state-level benefit taxation isn’t new

    Older adults can spot all sorts of confusing headlines online, like one that read “41 States That Will not tax Social Security benefits in 2025.” A Redford Township retiree told me last week that the headline, which seemed to imply a big change coming, had led her to consider stopping withholding taxes from her Social Security payments each month .

    But nothing changes in Michigan – which is one of the 41 states mentioned – in 2025 when it comes to taxes on Social Security benefits on state income tax returns.

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

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

    Many Michigan retirees still withhold federal income tax on Social Security benefits each month to address potential tax obligations that will arise when they file their federal income tax returns each year.

    An individual can start, change, or stop tax withholding at any time by calling Social Security at 800-772-1213. Representatives are available between 8 a.m. and 7 p.m. on business days. Or someone can download and print Form W-4V and fax or mail it to their local Social Security office.

    However, before taking rash action, it may be wise to have this strategy consulted by your tax professional.

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

    Umito
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