income taxes cut on Social Security: With his pledge to remove Social Security levies, former President Donald Trump is directly targeting the 67 million Americans who get monthly benefit checks from the retirement and disability program.
At a campaign rally on Wednesday in Harrisburg, Pennsylvania, Trump declared, “Seniors should not pay taxes on Social Security and they will not.”
Because the National Council on Aging reports that senior poverty is on the rise and that the U.S. Government Accountability Office has discovered that millions of older workers are approaching retirement without having saved a single penny, such a vow would prove to be a powerful campaign platform. According to the SSA, approximately 40% of Social Security claimants currently pay federal income taxes on their benefits.
However, analysts told CBS MoneyWatch that lowering income taxes on Social Security income would eventually hurt the program since it would cut off taxes, one of its funding streams, hastening the trust funds’ insolvency. Should that come to be, the Social Security Administration might be compelled to reduce benefits more drastically one year sooner than currently anticipated.
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A request for comment from the Trump campaign was not answered.
The majority of Social Security is funded by payroll taxes or the FICA levies deducted from employees’ paychecks. However, the most recent annual report from the Social Security Board of Trustees states that the income taxes that beneficiaries pay on their benefits provide about 4% of the funding for the program.
According to the Center on Budget and Policy Priorities, while four out of five Social Security beneficiaries are elderly, the remaining recipients are either disabled benefit eligible or the surviving wives or children of deceased workers.
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The budget problems facing Social Security have been building for years, in part because of the shifting demographics of the country. Growing financial demands are placing more and more strain on the program as baby boomers retire at record rates and seniors live longer.
Social Security is currently disbursing more benefits than it is earning as a result of this change, which is depleting the $2.7 trillion in assets maintained in its trust funds—the reserves used to pay retirement and disability benefits.
According to the Social Security Administration’s most recent report, the trust fund that pays Social Security benefits is expected to run out by 2033, at which point the government would have to reduce recipients’ monthly benefits by 17%.
On Wednesday, the Committee for a Responsible Federal Budget (CRFB), a nonpartisan advocacy group focused on fiscal policy, estimated that Trump’s proposal to eliminate income taxes on benefits would eliminate $950 billion in revenue for Social Security over the next ten years.
This would force the Social Security Administration to reduce compensation even further than it now anticipates and advance the program’s bankruptcy date by one year, to 2032, according to the organization. According to the CRFB’s assessment, recipients would see a 25% reduction in their monthly checks in 2032.
Are benefits from Social Security taxable?
Some Americans believe incorrectly that Social Security benefits aren’t taxable, maybe because this type of income wasn’t subject to taxes until 1984. However, Social Security income beyond a specific threshold became taxed due to reforms signed into law by President Ronald Reagan.
Since those criteria haven’t been updated for inflation since 1984, more seniors are becoming subject to the tax, which means that more middle-class recipients are having to pay taxes on their Social Security benefits on an annual basis. For example, the Congressional Budget Office reports that in 1998, 26% of seniors paid taxes on their benefits. Right present, that percentage is 40%.
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Individual taxpayers may be required to pay income tax on up to half of their benefits if their total annual income (Social Security and other income, such as dividends or retirement distributions) falls between $25,000 and $34,000. Over $34,000 earners are subject to paying taxes on up to 85% of their Social Security income.
Married couples with earnings exceeding $44,000 may be taxed on up to 85% of their benefits, while joint filers with incomes between $32,000 and $44,000 may be required to pay income tax on up to 50% of their benefits.
For example, a single filer with an average yearly Social Security payout of $22,884 and a total annual income of $50,000 would pay taxes on $19,451, or 85% of their benefits. Their Social Security income would only be tax-free up to $3,433.
Trump’s assurances on taxes
Trump has previously pledged during the campaign path to cut taxes for particular demographics. The former president promised in June to remove tip taxes for service providers, a move estimated by analysts to come for $250 billion over ten years.
According to Altman, many elderly could find it appealing to have their benefit checks taxed no longer. Despite the annual cost-of-living adjustment applied to Social Security payouts, she said many older Americans feel as though they are falling behind following years of rising inflation.
According to Altman, Trump’s proposal for Social Security may be crafted to entice elderly voters who were turned off by a conservative House group called the Republican Study Committee’s plan to raise the retirement age for both Social Security and Medicare to 70. Seniors can apply for Medicare at age 65, but the current Social Security full retirement age is 67.
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It’s uncertain if Trump’s plans to abolish Social Security benefits or tip taxes would be implemented if he were elected. One obstacle would be passing legislation to alter the tax code if Democrats were to take control of the House or the Senate during a second Trump term.
Paul Ashworth, chief North America economist at Capital Economics, notes that unlike this time in the 2016 campaign, Trump has not yet disclosed specific details for his tax proposals.