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

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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 will soon be sitting at breakfast wondering whether they should rush to reduce their tax withholdings before 2025.

    But don’t put that on your to-do list yet.

    We’re talking about some pretty big hurdles to such a change happening as early as next year, if ever.

    “The first chance that Congress will likely consider the Social Security benefits provision is likely to be if it is included in a major tax bill introduced in 2025 as part of budget reconciliation procedures,” said Mark Luscombe, principal analyst at Wolters Kluwer Tax & Accounting in Riverwoods. , Illinois.

    Congress can use the special reconciliation process in some cases to expedite high-priority legislation on taxes, spending and debt reduction — and avoid a filibuster in the Senate.

    A long list of soon-to-vanish tax breaks will be a major concern for Congress next year, as the many individual provisions in the Tax Cuts and Jobs Act of 2017 — which was passed when Trump was the 45th president of the United States — states — expires at the end of 2025.

    Will Social Security benefits be tax-free in 2025?

    Luscombe and other tax professionals warn that retirees and others should not expect rapid change regarding potential taxes on some Social Security benefits.

    Luscombe said eliminating taxes on Social Security benefits through the budget reconciliation process would prove challenging because the loss of revenue would be significant and would need to be offset.

    “With growing concerns about deficits and some potential opposition among Republicans to Trump’s main proposed revenue raiser, tariffs, it could be difficult to include all of Trump’s proposed tax breaks,” Luscombe said.

    Or if they are all included, Luscombe says, these tax breaks could expire after 10 years, as happened 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 that would require overcoming some of these hurdles,” Luscombe said.

    Anna Taylor, deputy leader of the tax policy group at Deloitte in Washington, DC, argues that the president-elect’s proposal to eliminate taxes on welfare benefits would not work in a reconciliation package.

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

    “It’s something that could get some Democratic support in the right scenario, but it would depend on what the context was,” Taylor said during a media briefing on Tuesday.

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

    More: The head of Social Security visits Detroit, clears myths, complains about workforce levels and more

    Many people now don’t pay taxes on Social Security benefits

    It’s important to note that not everyone pays taxes on their Social Security benefits. For example, if such a change were to occur, it would provide no additional savings for a single retiree whose combined income is about $24,000 per year or less and who now pays no taxes on benefits.

    About 40% of people who receive Social Security must pay income taxes on their benefits, according to a Social Security Administration report.

    Unfortunately, it doesn’t take much additional income to be hit with certain taxes because the income thresholds that tax Social Security benefits do not adjust for inflation.

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

    Couples who file a joint return must pay taxes on 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, up to 85% of the benefits would be taxable.

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

    As a result, someone who works while receiving Social Security benefits would have to consider their income from a job. The same goes for someone who is retired and making taxable withdrawals from traditional 401(k) plans.

    Eliminating taxes on Social Security benefits could be a tough sell

    Eliminating the complicated tax headaches for retirees sounds like a great idea to many. But ending or lowering taxes on Social Security benefits has been proposed a few times before — and gone nowhere.

    For example, the “You Earned It, You Keep It Act” was introduced in 2022 by Minnesota Democrat Angie Craig as a way to repeal federal taxes on Social Security benefits for retirees. That tax cut was to be paid for by raising the ceiling for individuals earning more than $250,000 annually and requiring more Social Security taxes to be paid by those wage earners. The bill was also introduced in 2024.

    Under such a plan, these higher wage earners would pay the 6.2% payroll tax on nearly $74,000 more of their wages. Their employers would face the same kind of change.

    Currently, the Social Security payroll tax cap, which applies to both employees and employers, will rise to $176,100 in 2025 – up from $168,600 in 2024. The increase, based on inflation, was announced by the Internal Revenue Service in October .

    Some experts would prefer that the income tax thresholds that apply to Social Security benefits be indexed for 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, not to the U.S. Treasury Department’s general fund. According to Social Security, Social Security beneficiaries do not fully fund their benefits through their payroll taxes.

    Trust funds are used to support payments to Social Security beneficiaries and are expected to default in 2035, a year later than estimated last year by the Social Security Board of Trustees, based on an annual report released in May submitted.

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

    We’ll no doubt see all kinds of confusing headlines regarding 2025 tax planning. But right now, it’s difficult to take many steps — including eliminating or reducing — your 2025 income tax withholdings.

    We simply don’t know what is likely to happen or when, even with the Republican Party expected to control the House. The Republican Party has a narrow majority in the Senate.

    Some of the talk about taxing benefits at the state level is not new

    Seniors may discover all kinds of confusing headlines online, such as one that reads, “41 States That Won’t Tax Social Security Benefits in 2025.” A Redford Township retiree told me last week that the headline, which seemed to imply a big change ahead, prompted her to stop withholding taxes from her Social Security benefits every month.

    But in Michigan – one of 41 states listed – there will be no change in 2025 when it comes to taxes on Social Security benefits on income tax returns.

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

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

    Many Michigan retirees still withhold federal income taxes from Social Security benefits each month to address potential tax liabilities that will crop up 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 on workdays between 8:00 AM and 7:00 PM. Or someone can download Form W-4V, print it and fax it or mail it to the local Social Security office.

    Before you take any hasty steps, however, it may be wise to run this strategy by your tax advisor.

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

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