It might not all be good news: Donald Trump’s plan to eliminate taxes on Social Security – AS USA

In the 1980s, as unions weakened and jobs migrated overseas, pensions began to be replaced by private retirement accounts such as 401(k)s and Roth IRAs. Funds paid into these accounts are deductible, allowing employers to reduce their tax liability. When workers who are offered these retirement benefits begin to retire, their Social Security benefits will be paid in addition to their monthly payments, and that income may continue to be taxed.

Donald Trump's campaign promise

President-elect Donald Trump has called for abolishing the Social Security tax at the federal level. Although many arguments support this behavior, it also raises some problems. The Social Security Fund is currently insolvent, meaning more money is being taken out than put in. Taxes on Social Security benefits help close that gap, and eliminating it would only widen the gap and further destabilize the program available to tens of millions of seniors. They rely on it as their main source of income.

outdated tax system

According to the Social Security Administration (SSA), about 40% of Social Security recipients pay taxes on their benefits. However, because the income levels at which tax is determined were set in 1984 and have not yet been adjusted for inflation, these outdated standards mean that even more beneficiaries will be subject to tax. Masu.

Below are the income standards that determine which Social Security recipients have their benefits taxed and how they look when adjusted for inflation.

Some financial planners, like Jordan Gilberti, Senior Lead Planner and Certified Financial Planner at Facet, believe these thresholds are not adjusted because so few people understand the mechanics. The fact that there is no tax is considered a “stealth tax.” In an interview with USA TodayMr. Gilberti said that although many people are aware that “Social Security is taxed,” they often don't know how it works, and that when he explains the process, “people are devastated.” said. The U.S. Census Bureau estimates the median household income for seniors in 2022 to be $50,290. In other words, if these standards were adjusted, many of these households could no longer pay taxes on their benefits.

There is another perspective to bring to the discussion. There are two main arguments for why Social Security benefits should not be taxed. The first, which motivates politicians like Donald Trump, is that seniors should not have to pay taxes on tax-funded benefits (earned during their working years). . The argument is that about 10 percent of older adults live in poverty, and that taxing these benefits would make budgeting more difficult for those above the poverty line but still facing hardship. The fact that it could be made all the more convincing. However, if tax rates were adjusted for inflation, the majority of beneficiaries would not be taxed, and it would be the wealthy who would be taxed, who may not have paid their fair share of Social Security taxes. . labor force. Are we not paying our fair share? All workers earning less than $132,900 annually pay 12.4 percent of their income in Social Security taxes (half paid by the worker and half paid by the employer). However, those who exceed this level will only be taxed on their income up to that amount. By eliminating income limits, the federal government could ensure Social Security solvency for decades and also provide a $1,300 benefit increase to seniors who receive Social Security checks of less than $16,000 a year. You can do it. This is nearly 30 percent of all beneficiaries. The ability to expand benefits makes the issue of taxing Social Security less of an issue, but it does not eliminate the issue of benefits that ensure seniors have the income they need to retire with dignity. Maybe not. At the same time, the president-elect's plan to eliminate taxes on these federal benefits will not materialize. While it does increase income, as you'll see below, it doesn't fundamentally change the budget situation for most beneficiaries.

How will taxes affect my retirement savings?

Based on the rules above, a person would receive a $1,920.48 check from Social Security (average for retired workers in August 2024) and a Roth IRA (taxes paid by the retiree when the funds were deposited into the account). Imagine you receive $2,000 from. This would result in a retiree's annual income of $47,045.76, or $3,920.48 per month. This amount represents up to 85% of their benefits, making tax rates an issue. Based on 2023 tax bracketThat leaves the retiree paying 22 percent tax on up to $16,320 of annual benefits, which equates to $5,070. Adding up the retiree's taxes results in an estimated annual income of $41,975.60. In contrast to a Roth IRA, if you own a 401(k), you also pay taxes when you withdraw funds from your account.

Retirees are especially hard hit when their income pushes them into a higher tax bracket. In 2023, incomes between $44,726 and more than $95,375 will be taxed at 22%, while incomes between $11,001 and $44,725 will be taxed at just 12%. Ta. In the example above, the retiree's income is not far from the 12 percent limit, and adjusting withdrawals from a Roth IRA could help reduce taxes and keep a higher percentage of savings and benefits. There is. . But because the limits are so low, those few thousand dollars can be the difference between retiring with dignity and struggling to make it to the end of the month.