Personal Finance

Trump Wants to Eliminate Taxes on Social Security Benefits -- but Will That Cause Even More Problems?

Maurie Backman

Published: January 17, 2025 8:39 am

Social Security is a critical source of income for millions of retirees, a good number of whom have to get by on those monthly benefits alone due to a lack of savings. But many Social Security recipients are surprised to learn that those benefits can be subject to taxes at both the federal and state level.

Losing a portion of that money to taxes hurts seniors who don’t have a lot of retirement income to live on. And so as part of his campaign, President-elect Trump pledged to get rid of taxes on Social Security benefits. Doing so would no doubt spell relief for seniors in the near term. But it could cause problems in the long run.

The problem with taxes on Social Security benefits

It would be one thing if only higher-earning retirees were forced to pay taxes on their Social Security income. But the income thresholds at which taxes apply on benefits are almost ridiculously low.

Taxes apply to single retirees with a combined income of $25,000 or more, or couples filing jointly with a combined income of $32,000 or more. Combined income is the total of a given filer’s adjusted gross income plus tax-exempt interest income plus 50% of their yearly Social Security income.

But these aren’t large amounts, even though they only account for 50% of annual Social Security income. Say someone gets $2,000 a month in Social Security, or $24,000 per year, and withdraws $1,500 a month, or $18,000 per year, from their IRA. That brings their total annual income to $42,000 and puts their combined income at $30,000. But a single tax-filer in that situation would then owe taxes on some of their Social Security benefits for exceeding the $25,000 combined income threshold.

Meanwhile, in that same situation, that retiree might also be paying taxes on their IRA withdrawals if their money isn’t in a Roth. That leaves them with very little to live on.

Is eliminating taxes on Social Security really a good idea?

Trump’s plan to get rid of taxes on Social Security benefits is clearly intended to help seniors. And to be clear, it could be a helpful thing — at least in the near term.

But Social Security is also facing a financial shortfall that could result in broad benefits cuts in about a decade’s time, or whenever the program’s trust funds officially run dry. If taxes on Social Security benefits are eliminated, the program will be denied a key revenue stream it desperately needs right now. Doing so could push up the timeline for benefit cuts or make them a more likely possibility on a whole.

That’s why a better solution may be not to eliminate taxes on Social Security benefits, but rather, to raise the thresholds for combined income so they’re more in line with inflation. Those thresholds were established decades ago and have not been adjusted since — which really makes very little sense.

All told, Trump’s idea to eliminate taxes on Social Security may be well-intentioned. But unfortunately, in solving one problem, it only creates another.