You pay Social Security Tax throughout your career, so if you have to pay benefits taxes in retirement, it may feel a little unfair. But this is the reality facing more and more retirees. This is a major pain point, especially for those who don’t have a lot of personal savings to supplement checks.
President Trump's campaign promise to cancel the Social Security tax, which resonates with many retirees, which may soon become a reality. Rep. Thomas Massie (r-ky.) recently introduced the Elderly Elimination Tax Act to the House, which would exempt Social Security Benefits from federal taxes. We don't know if it will pass, but there is already some data on saving money taxes – which may surprise you.
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The IRS began taxing Social Security benefits in 1984 and added a second tax a decade later. Since then, the Social Security Benefit Tax formula has remained the same. The government may tax a portion of your Social Security benefits based on your marital status and temporary income, defined as adjusted gross income (AGI), and if you own municipal bonds, as well as your annual Social Security Half, then there may be any unmovable interest benefits.
The following table shows the current social security benefits tax levels:
Marital status
If temporary income is the following, it is a 0% benefit taxable:
If temporary income is between, up to 50% taxable benefits:
If temporary income exceeds:
Single
$25,000
$25,000 and $34,000
$34,000
Married
$32,000
$32,000 and $44,000
$44,000
Source: Social Security Bureau.
The level you belong to determine the percentage of Social Security benefits that you pay for ordinary income tax. In the worst case, you can owe 37% of your taxes and pay up to 85% of your benefits. Most people pay far less than that, but these taxes still put a burden on those who live with low fixed incomes.
As you may have realized from the table above, families with the lowest income will not immediately benefit from the federal government because they do not pay Social Security taxes. However, cost and average social security checks continue to increase, pushing more people's benefits to taxable areas each year. Therefore, if the current law remains in effect, eliminating the welfare tax can save some lower income earners from the future tax they owe.
If the IRS cancels the Social Security Benefit Tax, it is no surprise that wealthy people will see the biggest gain. They first have to pay the Lion Social Security Benefit Tax. Analysis by the University of Pennsylvania Wharton Budget Model Group found that if the government stops taxing Social Security benefits, the highest 0.1% will save an average of $2,450 in taxes in 2025. By 2054, their annual savings will rise to $5,080.
Meanwhile, if the Social Security Benefit Tax ends, the average American – who falls into 40% to 60% of the income group will pay about $340 in the annual tax in 2025. By 2054, their estimated savings will be $1,730 per year.
For those who fell to the 60% to 80% income group, it will be $1,135 and $3,560 in 2025 and 2054, respectively. In the 80% to 90% revenue group, $1,625 and $4,075 were saved, respectively.
But middle and high school Americans will actually earn the most income. Most millionaires and billionaires won’t notice significant changes in their quality of life in 0.1%, from saving an additional $2,450 a year. However, saving $1,135 to $1,625 can significantly improve the lives of those who live in more modest incomes.
Penn Wharton's research found that income after tax will change about 1% in 60 to 90% of the income group, with little change for the wealthiest Americans. If the government removes taxes, middle-income Americans will see a 0.5% change in after-tax income.
One thing to keep in mind about all these numbers is that they apply to all members of the income group regardless of their age. Those who actually pay taxes on Social Security benefits may see larger, more direct savings.
Get rid of the Social Security Benefit Tax for ordinary Americans and wealthy Americans has clear short-term benefits. However, the long-term consequences are difficult to predict. Social Security Benefits Tax is one of only three sources of funding for the program. Eliminating it will put greater pressure on social security, which is already facing a $23 trillion funding shortage.
According to current estimates, the program's trust funds are expected to run out by 2035. Unless the government finds a way to increase social security funding before this, all social security benefits must be cut by 17%. Cutting social security benefits will accelerate this deadline.
This is not to say that it is impossible to eliminate social security benefits and ensure their solvency to future generations. However, the government also has fewer options for reforming the plan until the trust fund is exhausted.
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President Trump's plan to eliminate social security taxes will save thousands of dollars a year. This is the average benefit of Americans originally published by Motley Fool
