Tired of Paying Taxes on Social Security? Here’s How Likely That Rule Is to Change
Imagine being retired and having to adjust to living on a fixed income. It may not be the easiest thing to go from a steady paycheck to a combination of modest IRA or 401(k) withdrawals and a monthly Social Security check. But that’s the situation a lot of retirees end up in. Not everyone ends […] The post Tired of Paying Taxes on Social Security? Here’s How Likely That Rule Is to Change appeared first on 24/7 Wall St..

Key Points
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Many seniors today pay taxes on their Social Security benefits.
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President Trump has proposed eliminating those taxes.
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Since that could cause major repercussions, seniors should not expect those taxes to go away anytime soon.
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Imagine being retired and having to adjust to living on a fixed income. It may not be the easiest thing to go from a steady paycheck to a combination of modest IRA or 401(k) withdrawals and a monthly Social Security check. But that’s the situation a lot of retirees end up in.
Not everyone ends their career with millions of dollars banked. Even if you have, say, a $300,000 nest egg, which is nothing to scoff at (and more than the median balance among Americans aged 65 to 74), you may end up in a situation where the bulk of your senior income comes from Social Security. And in that scenario, you’d probably be counting on keeping those monthly benefits in full.
But unfortunately, that’s not a given. Social Security benefits are not only taxable, but taxable for people with relatively low incomes.
President Trump, however, has pledged to change that. As part of his campaign, he stated repeatedly that he felt that no one should have to pay taxes on Social Security.
But will his plan to get rid of those taxes succeed? That’s pretty questionable at this point.
The problem with eliminating taxes on Social Security
Social Security gets most of its revenue from payroll taxes. But it also gets revenue from the taxes seniors pay on their monthly benefits. And right now, Social Security needs all the revenue it can get.
In the coming years, the program is facing a financial shortfall as baby boomers retire in droves and start claiming benefits at the same time. The rate of replacement workers is expected to fall short, which means Social Security will be seriously strained, to the point where it will need to tap its trust funds to keep up with scheduled benefits.
Social Security can hang on for a while. But once those trust funds run out of money, the program may have to cut benefits.
Recent projections have the Social Security trust funds running dry in 2035. But that timeline could certainly wiggle. And if taxes on Social Security benefits are eliminated, it could push the program’s insolvency date up by a few years, resulting in benefit cuts sooner than anyone is ready for.
It’s for this reason that Trump’s plan to eliminate taxes on Social Security benefits is unlikely to get voted in by Congress. Doing so could all but guarantee that Social Security cuts are coming. And that’s a situation lawmakers are hoping to avoid.
How to cope with taxes in retirement
The taxes you pay on your Social Security benefits may not even be the only taxes you’re on the hook for. If you have your savings in a traditional IRA or 401(k), withdrawals are taxable, too. So is interest income in your bank account and any dividend or interest payments you receive from a taxable brokerage account.
That’s why it’s a good idea to sit down with a financial advisor or tax professional ahead of retirement and talk through some tax mitigation strategies. A professional can help you find ways to lower that burden in retirement, no matter how much money you have or expect to have. And if you’re already retired and frustrated by taxes, it’s not too late to get help, either.
The post Tired of Paying Taxes on Social Security? Here’s How Likely That Rule Is to Change appeared first on 24/7 Wall St..