Trump’s Promise: Federal Taxes on Social Security May Disappear

“I will govern by a simple motto: Promises made, promises kept.”

President-elect Donald Trump made this statement during his victory speech on November 6, 2024. In his campaign, he made several promises, notably one that stands out for American senior citizens.

Trump’s plan could eliminate federal taxes on Social Security benefits. However, this has significant implications for retirees.

Image source: Official White House photo by Shealah Craighead.

Boosting Retirees’ Finances

Many retirees currently avoid state income taxes on their Social Security benefits. In fact, nine states have no income taxes at all. Additionally, 27 states exempt Social Security benefits from state income taxes. However, federal income taxes affect nearly 40% of retirees.

As it stands, individuals filing federal tax returns may be taxed on their Social Security benefits if their combined income falls between $25,000 and $34,000. For those earning above $34,000, up to 85% of their benefits may be subject to federal tax. Couples filing jointly with a combined income of $32,000 to $44,000 face the same scenario, possibly taxed on up to 50% of their benefits.

Eliminating these federal taxes could leave many retirees with more money in their pockets, enhancing their financial situation.

The Cost of Changes

While the idea of removing federal taxes on Social Security benefits seems appealing, there is a significant downside: these taxes help to fund Social Security itself.

For much of its history, Social Security benefits remained untaxed federally. This changed in 1984, when a bipartisan agreement introduced taxation on benefits to support the program financially.

Trump’s plan doesn’t stop at eliminating taxes on benefits; he aims to implement additional changes that could reduce Social Security funding. This includes the proposal to eliminate taxes on tips and overtime, which could have further implications.

The nonpartisan Committee for a Responsible Federal Budget estimates that Trump’s primary proposals could increase Social Security’s cash deficit by about $2.3 trillion by 2035. This could lead to the depletion of Social Security’s trust funds, which may happen three years earlier than currently expected.

During the campaign, Trump indicated that boosting domestic oil and gas production would help resolve Social Security’s funding issues. However, analyses suggest that this strategy may not effectively enhance Social Security’s finances.

Challenges to the Proposal

Any changes to Social Security will require at least 60 Senate votes to overcome a likely filibuster from Democrats. Gathering the necessary votes from both parties to eliminate taxes on Social Security benefits could prove challenging.

This proposal might ignite a broader conversation about ensuring Social Security’s long-term viability, a discussion that is much needed in Congress. Even if Trump cannot fulfill his pledge to abolish federal taxes on benefits, the program’s trust funds are projected to be depleted by 2035, which would result in significant benefit cuts unless extensive reforms are enacted.

Uncovering Hidden Benefits

Many retirees may not realize they could enhance their retirement income with certain “Social Security secrets.” One simple strategy could lead to up to $22,924 more annually. Understanding how to optimize Social Security benefits may offer valuable financial assurance for retirement. Click here to explore these strategies further.

View the “Social Security secrets” »

The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.