The House of Representatives recently passed a significant tax bill. Still, it does not include the elimination of taxes on Social Security benefits, which was a key proposal from President Donald Trump’s 2024 campaign. While this may disappoint some retirees, experts suggest that maintaining these taxes could be beneficial for the long-term stability of the Social Security program. During his campaign, Trump promised not to cut Social Security benefits or raise the retirement age for new beneficiaries.
His most notable proposal was to eliminate taxes on Social Security benefits, which can significantly reduce the value of each retiree’s monthly check. However, the new tax bill does not include this provision. Social Security is facing a significant shortfall, with the latest Trustees Report estimating that the trust fund for retirement benefits will be depleted by 2033.
At that point, incoming funds will only support about 79% of the benefits due. The program relies on three primary revenue sources: taxes on wages, net interest income, and taxes on Social Security benefits. Eliminating the tax on Social Security benefits could accelerate the depletion of the trust fund, potentially requiring even larger cuts in benefits.
The Committee for a Responsible Federal Budget estimates that eliminating these taxes could accelerate the trust fund depletion by over a year and necessitate a 25% cut in benefits, rather than the projected 21%.
House passes tax bill provisions
Instead of cutting taxes on Social Security benefits, the new tax bill offers Americans aged 65 and older an additional $4,000 tax deduction, provided their income remains below certain thresholds.
This could provide seniors with some relief while having a less negative impact on Social Security in the long run. Low-income households pay very little in taxes on Social Security income, making them less affected by these taxes. The bottom 40% of households by income receiving benefits pay an average of less than 1% in taxes on their benefits.
Even high-income households, those with an annual household income of more than $205,800, face an average tax burden of just 20%. As the bill moves to the Senate, experts advise against making any financial plans based on the current versions of the legislation. Lisa Featherngill, national director of wealth planning at Comerica Bank, suggests waiting until a final version emerges from the conference committee before making decisions.
Other key provisions in the bill include a bonus deduction for seniors, changes to the state and local tax (SALT) deduction, an increase in the estate tax exemption, and a proposed increase in the required minimum distribution (RMD) age. These changes could offer planning opportunities, particularly for Roth IRA conversions, but careful consideration of tax implications and timing is crucial. In conclusion, while the retention of Social Security taxes may seem contrary to specific campaign promises, it helps maintain the program’s stability. It ensures that current and future beneficiaries receive their promised benefits.
As the bill progresses through Congress, retirees and those planning for retirement should stay informed and consult with financial experts to make the most of any potential changes.