The issue of taxing Social Security benefits has gained bipartisan attention in recent years, with proposals at both the federal and state levels. While Former President Donald Trump has advocated for exempting Social Security from federal income taxes, Minnesota Governor Tim Walz has signed state legislation to achieve a similar goal. However, there are key differences between a federal tax proposal and state legislation, including the political and fiscal landscape. Policy experts emphasize the importance of understanding these nuances when assessing the impact on retirees.
Currently, federal income taxes on Social Security benefits are determined based on “combined income,” which includes adjusted gross income, non-taxable interest, and half of Social Security benefits. Individuals with combined incomes between $25,000 and $34,000 (or $32,000 and $44,000 for married couples filing jointly) may have up to 50% of their Social Security benefits subject to taxation. For those with combined incomes above these thresholds, up to 85% of benefits could be taxable. Approximately 40% of Social Security recipients currently pay federal income tax on their benefits, according to the Social Security Administration.
Richard Auxier, a principal policy associate for the Urban-Brookings Tax Policy Center, describes Trump’s proposal to exempt Social Security from federal income tax as “transformative.” This change would have significant implications for the cost and funding of Social Security, potentially increasing the budget deficit by $1.6 trillion over a decade, according to estimates from the Tax Foundation. Furthermore, it could accelerate the insolvency of the Social Security and Medicare trust funds, moving up projected dates of insolvency.
Trump’s campaign has not provided further details on the proposal, leaving questions about its potential repercussions unanswered. While the aim to relieve seniors from tax burdens is commendable, the long-term sustainability of such a policy remains a point of contention among experts.
In contrast to the federal proposal, Minnesota implemented a state tax exemption for Social Security benefits in 2023. This exemption applies to taxpayers with adjusted gross incomes below $78,000 (or $100,000 for married couples filing jointly), allowing them to deduct Social Security benefits from earnings. By exempting most seniors from income taxes on Social Security, Minnesota aims to align its tax policies with those of other states.
Jared Walczak, vice president of state projects at the Tax Foundation, highlights the targeted nature of Minnesota’s policy and its relatively lower revenue cost compared to the federal proposal. Only nine states currently tax Social Security benefits to varying degrees, indicating a growing trend towards exempting retirees from this financial obligation. State-level initiatives offer a more localized approach to addressing the tax burden on seniors, with different implications for state budgets and revenue streams.
As debates over the taxation of Social Security benefits continue, retirees and policymakers must carefully consider the implications of proposed exemptions. While federal and state initiatives seek to alleviate financial burdens on seniors, the fiscal consequences of such policies should not be overlooked. Balancing the immediate relief for retirees with the long-term sustainability of social security programs remains a critical challenge that requires thoughtful analysis and informed decision-making.