For ninety years now, the Social Security program has provided tens of millions of Americans with a stable income during their retirement years or in the event of becoming disabled. Simply put, employees pay a percentage of their monthly earnings into the Social Security payroll tax during their working years, which earns them work credits. Then, later, when they retire, they receive their contributions back in the form of monthly Social Security benefits, allowing them to rest easy knowing they will have an income during their retirement.
In order to better maintain the financial health of the program, it was previously decided that Social Security income would be taxed if it exceeds a certain threshold. Beneficiaries whose sole source of income is their monthly benefit check will likely be exempt from this; however, for those who have additional sources of income supplementing their Social Security benefits, taxation is a possibility depending on their income threshold.
As such, during his 2024 presidential campaign, Donald Trump often pledged to eliminate taxes on Social Security benefits if elected to office. Subsequently, since being elected, President Trump signed his mega bill, the One Big Beautiful Bill Act, into law on July 4. Under this new legislation, taxes on benefits have not been eliminated; however, seniors will benefit from a temporary tax relief.
It is also worth noting that the income thresholds used to determine whether your Social Security benefits will be taxed have remained unchanged for more than thirty years. So, while seniors will benefit from the additional $6,000 tax deduction until 2028 under the new legislation, no permanent or long-term changes have been made to tax rules with regard to Social Security income. Here is what you need to know.
How is Social Security income taxed?
When the Social Security program was first introduced in 1935, benefit income was exempt from federal taxation. This lasted for several decades until the amendments of 1983, when Congress decided that up to 50% of benefit income could be taxed if the retiree’s income exceeded a certain threshold.
Fast forward another decade, and in 1993 it was decided that up to 85% of benefit income would be subject to taxation for beneficiaries who are considered high earners. As such, today taxability is determined in relation to your combined income (adjusted gross income + nontaxable interest + half of Social Security benefits).
- You can pay tax on up to 85% of your benefits if you file the following, as per the SSA:
- A federal tax return as an individual and your combined income exceeds $25,000.
- A joint return, and you and your spouse have combined income of more than $32,000.
Unchanged rule costs retirees
While the threshold for taxable benefit income has remained unchanged for the past 30 years, benefit amounts are adjusted annually to account for inflation. And despite the annual Cost-of-Living Adjustments being minor, depending on a retiree’s income, a COLA increase can push them above the threshold; as a result, they will have to pay taxes since they are unwittingly moved into higher tax brackets.
This is known as “bracket creep,” and it occurs when inflation moves taxpayers into tax brackets they were never intended to be in. In short, the buying power of the benefit income for these individuals is lost—ironically enough—because of the increase that is given to maintain buying power in the face of inflation.
Some lawmakers have raised this issue, and attempts at change have been made—such as the “No Tax on Social Security” bill proposed earlier this year—however, it has not made any progress in Congress.