Trump Wants To Eliminate Social Security Taxes: 3 Moves Retirees Should Make This Winter
Retirees living on Social Security income alone don’t pay federal income tax on their benefits. But if you have earned income that falls above certain thresholds, you could owe tax on up to 85% of your benefits — a fact that catches many retirees off-guard.
Former President Donald Trump has pledged to end that tax if he is elected president in November. Although his official campaign platform makes no mention of tax breaks for retirees, he has on numerous occasions, including at his rallies, during media interviews and on his Truth Social social media platform, said he’d entirely eliminate tax on Social Security retirement benefits.
That sounds like good news for the roughly 40% of retirees who the Social Security Administration said pay the tax. According to an estimate by the nonpartisan Senior Citizens League, a similar proposal introduced to the U.S. House of Representatives in January could’ve saved the typical retiree household $497.52 in 2022 — the most recent year for which Census income data is available.
But because that tax helps to fund Social Security, the loss of revenue could have chilling effects on the economy and on future benefits.
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In addition to adding $1.6 trillion to $1.8 trillion to the federal deficit through 2035, cutting the tax would hasten the depletion of the Social Security trust fund by a year and the Medicare trust funds by six years, according to the nonpartisan, nonprofit Committee for a Responsible Federal Budget.
In addition, federal law requires that spending be cut to match revenue in the event the trust funds run dry. That would increase the 21% benefit cut currently projected to 25% — a reduction that would disproportionately affect lower-income seniors who have little or nothing to gain from a Social Security tax cut.
As winter approaches, and with it a new administration in Washington, D.C., seniors can start preparing their finances for the effects of potential changes to their tax liability and future benefits.
You can also read about an economist’s prediction on what’ll happen to Social Security if Trump returns to the White House.
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Plan on What To Do With a Tax-Cut Windfall
The typical retiree will see modest tax annual savings if tax on Social Security is eliminated.
Adjusted for inflation, the 497.52 figure for 2022 climbs to about $527 for 2024. But that’s enough to start or bulk up an emergency fund, where every dollar saved is a dollar you won’t have to borrow in the event of a cash emergency.
If you already have debt, consider using the tax savings to pay it down.
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Budget for Benefit Cuts
The Trustees of the Social Security and Medicare trust funds expect the Social Security trust fund to be insolvent in 2033. A Social Security tax cut could advance insolvency to 2032, leaving you about seven years to plan for a possible 25% reduction in benefits.
You have just two options for doing that: spend less, and increase your income. A detailed budget can help you achieve both goals by revealing unnecessary spending that you can shift to savings to help offset the future loss of income.
Creating the budget now has the added bonus of helping you test out a more frugal lifestyle before you’re forced into making changes.
Increase Your Income
A side gig or part-time job will give you more money to save now so you have more to spend later.
Just be aware that for the time being, the earnings could result in your Social Security benefits being taxed — or, if they already are, increase the percentage that’s subject to tax. You can avoid a big tax bill in April by requesting that Social Security withhold federal income tax from your benefit checks.
If you’re not yet collecting Social Security, delaying filing can increase your benefits by 8% per year from age 62 to age 70. You can earn delayed retirement credits even if you’re already collecting by suspending your benefits until you reach age 70.
Editor’s note on election coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. For more coverage on this topic, please check out I’m a Retiree: 3 Reasons I’m Worried About the Future of Social Security if Harris Wins the Election.
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This article originally appeared on GOBankingRates.com: Trump Wants To Eliminate Social Security Taxes: 3 Moves Retirees Should Make This Winter