For ninety years now, the Social Security program has been providing retirees with a stable source of income during their sunset years. The process is relatively simple, what you put in is what you should get out. During your working years, you will contribute 6.2% of your earnings towards the dedicated Social Security payroll tax. Your employer will typically match this, making your total contribution 12.4%. These contributions will earn you work credits, and you can earn up to four work credits each year. In order to claim benefits from the Social Security Administration (SSA) upon retirement, you will need to have earned a minimum of forty work credits.
Forty work credits equates to ten years of work, however, the more you have earned, the higher your benefit since the formula takes into account 35 of your highest earning years. The logic is simple, your tax money is put into the program, and that same money is later returned to you in the form of benefits. So why are benefits still taxed?
When are Social Security benefits taxed?
As per legislation enacted in 1983, up to 85% of your benefits can be subject to taxation if your provisional income exceeds certain thresholds. The thresholds are listed as follows, as per the SSA:
- Up to 50% of your benefits is subject to taxation for single taxpayers with incomes over $25,000 and from taxpayers filing jointly with incomes over $32,000.
- Up to 85% of your benefits is subject to taxation for single taxpayers with incomes over $34,000 and for taxpayers filing jointly with incomes over $44,000.
Provisional income constitutes of a combination of half of your Social Security benefit, all of your taxable income, and a limited amount of your non-taxable income.
The One Big Beautiful Bill Act
On July 4th, President Donald Trump signed into law his mega bill and reconciliation package, the One Big Beautiful Bill Act. During the 2024 presidential campaign trail, the now-elected President Donald Trump repeatedly made a promise to eliminate taxes on Social Security benefits if elected to office. Subsequently, upon the passage of this legislation, several official channels including the White House and the SSA touted the bill as the elimination of taxes on Social Security benefits.
The framing of the bill in this manner has been stamped as misleading by advocates and lawmakers as the bill did not eliminate taxes on Social Security benefits. Instead, the One Big Beautiful Bill Act includes an additional tax break for seniors. As a result of this additional tax break, a higher percentage of Social Security beneficiaries will now be exempt from paying tax on their benefits.
The tax relief under the One Big Beautiful Bill Act is a temporary tax deduction that will be in effect for a temporary period ending in 2028. The tax relief will apply to seniors aged 65 and older. Single filers will receive a $6,000 tax deduction if their income remains within the $75,000 threshold. For joint filers, the tax deduction is $12,000 provided that the filer’s joint income does not exceed the $150,000 threshold. If your income exceeds these thresholds, the deduction begins to phase out. It is also worth noting that this temporary senior tax relief applies to all seniors aged 65 and older, regardless of whether or not they are claiming Social Security benefits.
In short, despite the claims that had circulated when the One Big Beautiful Bill was signed into law, tax on Social Security benefits have not been eliminated and the promises repeatedly made by President Donald Trump during the 2024 presidential campaign have not yet been fulfilled. This temporary tax break will, however, provide a number of seniors with much needed financial relief, albeit for a temporary period.