Last month, former President Donald Trump proposed eliminating taxes on Social Security benefits — since then, a number of policy experts have weighed in on the proposal. And lawmakers on both sides of the aisle have sought Social Security benefit tax reform for years.
Background. Under Code Sec. 86, between 50% and 85% of a taxpayer’s Social Security benefits may need to be included in gross income. A portion of benefits are subject to tax where a beneficiary’s modified adjusted gross income plus one-half of Social Security benefits exceeds a base amount — typically $32,000 for joint returns and $25,000 for single and head of household returns.
Beneficiaries whose modified adjusted gross income plus one-half of Social Security benefits exceeds $44,000 for joint returns or $34,000 for single and head of household returns are subject to a higher tax rate. For these higher-income beneficiaries, the maximum amount includible in gross income is 85% of Social Security benefits received in a tax year.
Policy experts weigh in. The Tax Policy Center modeled how excluding Social Security benefits from gross income would impact federal tax distribution and found it would reduce the average federal tax rate for all but the lowest quintile. While the greatest rate reduction would be realized by the middle and fourth quintile, the greatest dollar amount reduction would be realized by the top quintile — and specifically by the top 0.1%.
Tax Policy Center’s Howard Gleckman explained that those making $32,000 or less would see no tax cut because their Social Security income is already untaxed — and they’d also “take a significant financial hit” once Social Security becomes insolvent. Meanwhile, middle income households would see the greatest percentage reduction in taxes because “Social Security benefits often account for a substantial share of middle-income household earnings.”
The Tax Foundation’s Garrett Watson called Trump’s proposal “neither fiscally responsible nor sound tax policy.” Watson estimates that the exemption would “reduce tax revenue by about $1.4 trillion from 2025 to 2034” while having a “small” “overall positive effect on the economy.” Like Gleckman, he concludes the lowest quintile will see no benefit from the proposal using conventional modeling.
Watson notes that the income tax thresholds established in the 1980s and last updated in 1993 are not indexed for inflation, creating what he calls “bracket creep.” Rather than exempting Social Security benefits from income taxes across the board, he suggests indexing income thresholds for inflation — so long as this is “paired with an appropriate offset.”
American Enterprise Institute’s Kyle Pomerleau likewise concluded that “[c]ompletely exempting Social Security benefits from income taxation would worsen basic tax fairness.” And such an exemption would “worsen the finances of both Social Security and Medicare,” he added. But Pomerleau posited that linking Social Security benefits taxation to modified adjusted gross income “can discourage beneficiaries from working” — he suggests revising the underlying law to require a flat 85% of benefits be included in taxable income, or taxing 85% of benefits beyond a “fixed benefit threshold.”
Well before Trump’s proposal, back in 2019, the Center for Budget and Policy Priorities’ Paul N. Van de Water also concluded that “scaling back the taxation of Social Security benefits” is “unwise.” He explained that reducing Social Security taxes would make the program “less progressive” and “primarily help higher-income beneficiaries.” Van de Water noted lawmakers on both sides of the aisle have proposed reducing taxes on Social Security benefits but explained that this would require an increase in Social Security payroll taxes or a reduction in benefits — the costs of which “would likely fall in part on low- and moderate-income beneficiaries.”
Legislation. Shortly after Trump’s announcement, Representative Jefferson Van Drew (R-NJ) came out with a bill (H.R. 9359) to exclude Social Security benefits from gross income. But lawmakers have been busy for years strategizing how to limit taxes on Social Security benefits while keeping the program solvent — and the idea to exclude Social Security benefits from gross income is not new.
Representative Thomas Massie’s (R-KY) “Senior Citizens Tax Elimination Act” (H.R. 3206), has been reintroduced several times, and calls for the exclusion of Social Security benefits (and tier I railroad retirement benefits) from gross income. Thirty-four Republicans have signed on to the current bill.
And Senator Pete Ricketts (R-NE) has called for a phase-out of taxes on Social Security benefits. His “Social Security Check Tax Cut Act” (S. 2800) would begin that effort by making rate adjustments for the 2024 and 2025 tax years.
The proposed exclusion of Social Security benefits from income also is not particular to Republicans. Last year, House Ways and Means Social Security Subcommittee Ranking member John Larson (D-CT) introduced the “Social Security 2100 Act” (H.R. 4583) to broadly reform Social Security, including cutting taxes for 23 million middle-income beneficiaries, according to a press release. The bill has 188 Democrat co-sponsors, and Senator Richard Blumenthal (D-CT) has introduced companion legislation (S. 2280). Larson and Blumenthal previously introduced the bill in 2019 and 2021. Their proposal calls for paying for reforms by revising how payroll taxes are calculated for taxpayers earning over $400,000.
And back in January, Representative Angie Craig (D-MN) led the introduction of the “You Earned It, You Keep It Act” (H.R. 7084) which also calls for eliminating taxes on Social Security benefits. That bill, which balances the tax cut by “raising the cap on the Social Security payroll tax,” has amassed 11 Democrat co-sponsors. Craig’s bill is also not new to this congressional session.
In addition, Representative Joe Neguse (D-CO) has introduced the “Fairness in Social Security Act” in multiple sessions (most recently, last year as H.R. 4348) to exclude from gross income certain lump-sum Social Security benefit payments attributable to months before the taxable year.
For more on taxation of Social Security benefits, see Checkpoint’s Federal Tax Coordinator ¶ J-1455 et seq.
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