If you’re on Social Security and were looking forward to a tax break—maybe even a $4,000 deduction or no taxes at all on your benefits—I’m here to break it to you gently: that probably isn’t going to happen. Despite some big promises on the campaign trail, the new tax bill moving through Congress doesn’t include the help many seniors were hoping for.
Let me walk you through exactly what’s going on, why this tax break didn’t make it into the plan, and what it could mean for your wallet and the future of Social Security.
A campaign promise left out
You might remember last year’s then-President Trump during a campaign event saying that seniors shouldn’t be taxed on their Social Security benefits. He promised, “Seniors should not pay taxes on Social Security—and they won’t.” But that promise now appears to have been left out of the real bill ahead.
The current House Republican-backed bill does contain some tax cuts, including eliminating taxes on employee overtime pay and tips and codifying corporate breaks. But the repeal of taxes on Social Security benefits? It’s nowhere to be found.
Why it was left out: A rule stood in the way
Now you’re wondering—why not just include it? The answer has to do with something called the reconciliation process, a special legislative maneuver Congress uses from time to time to pass budget-related bills more efficiently. It allows lawmakers to avoid the usual 60-vote requirement in the Senate, which can be very hard to get.
There’s a catch, though.
There is a rule, called the Byrd Rule—named after the late Sen. Robert Byrd—that limits what can be included in reconciliation bills. Anything that doesn’t have a direct impact on federal spending or revenue changes in some limited way (e.g., altering Social Security’s structure or benefit formula) gets kicked out.
That is, even if Congress wished to remove taxes on Social Security benefits, it could not be accomplished under this fast-track procedure. Trying to force it in would be a violation of the rules, and the whole bill might be delayed.
What’s in the bill instead: A $4,000 deduction for seniors
And what are seniors getting instead of a full exemption from Social Security tax?
They also include a new proposed tax deduction that’s in the bill: an extra $4,000 deduction for individuals age 65 and older. It’s also an “expanded deduction for seniors,” and you might receive it whether you itemize or claim the standard deduction.
This sounds wonderful, and it could be—if you’re on a fixed income. The argument is that it would lower the amount of income being taxed. But there is a huge difference between a deduction and not paying taxes at all on your Social Security.
If your profits are big enough, even after deducting, you will likely still be required to pay tax on part of your benefits.
Who pays Taxes on Social Security now?
About 40% of Social Security recipients—that is, about 27 million people—pay federal income tax on their benefits. That’s a major jump from just 26% all the way back in 1998.
Why the increase? It’s because of how the tax system is set up.
In 1984, then-President Ronald Reagan signed into law a rule that allowed for some of your Social Security benefits to be taxed if your income was above a certain amount. But the catch is, those amounts of income were never adjusted for inflation.
So while the cost of living has risen over time, these tax brackets have not moved. That is to say that more and more people, just by getting minimal cost-of-living increases or picking up a part-time job, are discovering they are paying taxes on their benefits.
Where does that tax money go?
About 40% of Social Security recipients—that is, about 27 million people—pay federal income tax on their benefits. That’s a major jump from just 26% all the way back in 1998.
Why the increase? It’s because of how the tax system is set up.
In 1984, then-President Ronald Reagan signed into law a rule that allowed for some of your Social Security benefits to be taxed if your income was above a certain amount. But the catch is, those amounts of income were never adjusted for inflation.
So while the cost of living has risen over time, these tax brackets have not moved. That is to say that more and more people, just by getting minimal cost-of-living increases or picking up a part-time job, are discovering they are paying taxes on their benefits.
The bigger picture: What happens if those Taxes disappear?
It might sound great not to pay taxes on Social Security benefits anymore. But there’s a trade-off—and it’s a big one.
The Peter G. Peterson Institute, a nonpartisan think tank focused on fiscal policy, recently warned that eliminating those taxes would weaken the financial health of both Social Security and Medicare.
Here’s what could happen if those taxes were taken away:
- The Social Security Trust Fund could run out of money in 2032—a year earlier than current forecasts.
- The Medicare Trust Fund would be depleted by 2030, which is six years earlier than expected.
If that happens, millions of seniors could face automatic benefit cuts because there simply wouldn’t be enough money coming in to cover the promised payments.
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A warning from advocates
Maria Freese, a senior representative with the National Committee to Preserve Social Security and Medicare, further stated that leaving the tax exemption out of the bill will surely disappoint elderly people.
But at the same time, she warned that granting a tax cut today without addressing the program’s long-term financing needs is a “bait and switch.”
“You’re giving some seniors a benefit up front,” she continued, “but not warning them that all seniors would experience across-the-board cuts sooner than they would under current law.”
That is, what appears today to be a triumph may turn out to be a wonderful loss in the future if it brings Social Security to the brink of bankruptcy.
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What should you expect moving forward?
If you’re retired and receiving Social Security, here’s what you should keep in mind:
- You will likely continue to pay taxes on your benefits if your income is above the current threshold.
- The new $4,000 deduction for seniors, if it passes, could reduce your taxable income, but it’s not the same as eliminating taxes on benefits.
- Lawmakers may revisit the idea of removing taxes on Social Security in the future, but for now, the rules of the game (like the Byrd Rule) make that unlikely.
