Tax Experts: 7 Ways Trump’s Proposed Social Security Tax Cuts Could Impact the Middle Class
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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Tax cuts are generally welcomed by members of the middle class, many of whom feel that they are no longer experiencing the financial stability that used to define them.
One of the campaign promises President Donald Trump made was that his administration would cut taxes on Social Security for those who pay them, and the middle class waits to see if this will come to pass. It’s worth noting that not everyone does pay taxes on their Social Security benefits.
Currently, seniors who earn an adjusted gross income (AGI) of $25,000 per year ($32,000 for married couples) don’t pay taxes on their Social Security retirement benefits. When income goes above those thresholds, 50% of Social Security benefits are subject to income tax. For seniors who earn a combined income of $34,000 per year ($44,000 for married couples), an additional 35% of benefits are taxable, with this revenue going toward the Medicare HI trust fund.
Here are some considerations about potentially cutting taxes on Social Security and the impact on the middle class.
It Could Increase People’s Income
Crystal Stranger is an attorney, enrolled agent (EA) and CEO of OpticTax.com who has always felt that the tax on Social Security earnings “is immensely unjust” particularly for those seniors who are living off their Social Security earnings and have little other income.
She feels that the exemption amounts are too low, “as they have not been indexed for inflation.” She pointed out that while $25,000 may have been middle class when Reagan was in office in 1983, this is far from the case now and is below the poverty line in most states.
“Benefits have increased regularly, but the value of these benefit increases are limited in that they just create a greater amount of taxation also for the recipients,” she said.
It May Not Affect the Social Security Insolvency Issue
One of the concerns about ending this tax by some experts is that it could speed along the insolvency of the Social Security fund.
However, Stranger argued that “the amount of taxes paid on Social Security benefits does not go back in to solidify the Social Security system, this goes into the general Treasury.” Thus, she said, it “creates a system where it appears that more is actually being paid out to recipients of Social Security than the net amount once taxes are considered.”
It Could Change Their Tax Brackets
Stranger believes it would actually be better for Social Security recipients to not pay taxes on their benefits, even if a slightly smaller benefit was received.
She breaks it down, pointing out that when something is included as taxable income it raises your AGI, which is the number that determines the tax rate on all your other income.
So say someone receives $30,000 in Social Security benefits, they have another $30,000 in a pension and $10,000 in dividends. If Social Security was not taxable then their AGI including the dividends would only be $40,000, below the threshold where capital gains are taxed, Stranger pointed out.
As those dividends are likely qualified dividends, that would mean the $10,000 is untaxed, and this taxpayer would only pay tax on their net income from the pension. After their $16,550 standard deduction the tax due would only be $1,385. But if 85% of the Social Security is included, they will pay $5,945 in tax because the dividends are suddenly taxed at 15% rather than 0%, and their income is taxed at a higher rate overall after the standard deduction is considered.
It Could Reduce State Taxes, Too
At least 31 states also base their taxable income on the Federal calculation of AGI, Stranger said, so removing Social Security income from taxable calculations could reduce the state tax burden as well.
“For someone middle class living on only $70,000 per year, these federal and state taxes make a big difference in their quality of life, especially as the cost of living has been increasing in recent years,” Stranger said.
The impact of $20,000 or $30,000 higher income for someone already in high tax brackets is marginal, Stranger said, “but for someone lower middle class it may make the difference between being able to heat their house in winter or not.”
A Hollow Promise
However, according to Thomas J. Cryan, attorney and author of the new book Disrupting Taxes, Trump’s proposal to eliminate federal income tax on Social Security benefits may be little more than “a hollow campaign promise to distract the public from the reality of the larger elements at work with the extension of the Tax Cut and Jobs Act from 2017 that expires in 2025,” he said.
It May Benefit the Upper Middle Class More
Cryan pointed out that individuals who file jointly with a combined income of $32,000 currently pay no taxes on their Social Security benefits. “Therein, eliminating taxes on Social Security will be of the greatest benefit to older individuals with higher incomes, and lower income earners will see much smaller, if any, benefits.”
It Could Put Younger Workers at Risk
Moreover, Cryan suggested that removing this tax could put younger workers at risk, in that the elimination of taxes on Social Security benefits means that the Social Security Trust Fund will become insolvent faster. “[T]here might be no money in the Trust Fund when it is their time to collect Social Security benefits.”
Whatever the impact, Trump has yet to introduce formal legislation to make this change.
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