Today, about 68.5 million Americans receive Social Security benefits; for many, these monthly checks represent a major share of their retirement income.
Yet there’s often a wide gap between what Social Security provides and what retirees actually need to spend—a gap made even wider when income taxes eat into their benefits.
In January, the average monthly benefit for a retired worker was $1,976, while couples receiving benefits averaged $3,089.
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Research from J.P. Morgan Asset Management shows how important these payments are: Social Security replaces about 64% of income for retirees who earned $30,000 before retiring, but only 14% for those who made $300,000. Read J.P. Morgan Guide to Retirement 2025..
As a result, many retired Americans still struggle to maintain their pre-retirement lifestyle. While the gap won’t be easily closed, changing how Social Security is taxed may help.
Treasury Secretary Bessent suggested recently that Social Security income taxes may change for millions of Americans.
Image source: Bloomberg/Getty Images
How the IRS taxes Social Security today
Whether Social Security benefits are taxed depends on a retiree’s combined income – adjusted gross income plus nontaxable interest and half of their Social Security benefits. For 2025, the federal thresholds are:
Single, Head of Household, Qualifying Widow(er):Below $25,000: no benefits taxed$25,000–$34,000: up to 50% of benefits taxedAbove $34,000: up to 85% of benefits taxedMarried Filing Jointly:Below $32,000: no benefits taxed$32,000–$44,000: up to 50% of benefits taxedAbove $44,000: up to 85% of benefits taxed
High Income Taxpayers Pay More Taxes on Social Security Benefits
Tax Policy Center/TheStreet
About half of Social Security recipients pay some income tax on their benefits, with an average effective rate of around 7%, according to the Center on Budget and Policy Priorities.
Beneficiaries in the bottom income quintiles tend to owe a very small percentage (1% or less), while those in the top income quintile can pay as much as 20% of their benefits in income tax. Read Eliminating Taxation of Social Security Benefits Would Be Unwise.
How Social Security and Medicare is funded
Since the 1980s, the taxation of Social Security benefits has not only supported the Social Security system itself but has also provided vital funding for Medicare’s Hospital Insurance (HI) Trust Fund, which pays for Medicare Part A services such as hospital stays, hospice care, and skilled nursing facilities.
Related: How the IRS taxes Social Security income in retirement
Over the next decade, these taxes are expected to contribute more than $1.5 trillion to Social Security and Medicare, helping to delay potential trust fund shortfalls.
Social Security tax cuts are coming, but may have unintended consequences
Against this backdrop, Treasury Secretary Scott Bessent offered a preview of potential changes on April 29. Speaking about the tax bill currently under debate in Congress, Bessent highlighted President Trump’s proposal to eliminate federal taxes on Social Security benefits.
“President Trump is also adding things for working Americans – no tax on tips, no tax on overtime, no tax on Social Security, making auto payments deductible… that will substantially address the affordability of prices,” Bessent said. He suggested that more detailed proposals are forthcoming as part of a broader effort to make the 2017 tax cuts permanent and provide additional relief for working Americans.
While eliminating taxes on Social Security benefits may be popular with retirees, experts warn that doing so could accelerate funding problems for Social Security and Medicare unless alternative sources of revenue are identified.
Related: The 9 worst states for Social Security income taxes
“Eliminating taxes on Social Security benefits may be politically popular,” said Andrew Biggs, a senior fellow at the American Enterprise Institute and author of The Real Retirement Crisis. “But it helps high-income retirees, who already are among the very richest in the world, while undermining the finances of the Social Security program on which low-income seniors depend.”
There isn’t a strong policy rationale for eliminating benefit taxation, said Biggs.
“Social Security is already underfunded, and seniors are already a disproportionately high-income segment of the population, with lower poverty rates than either children or working-age adults,” he said. “It’s a policy in search of a rationale. The administration should talk more about steps to strengthen Social Security’s finances, which already are underfunded by over $24 trillion.”
According to the Center for a Responsible Federal Budget, President Trump’s proposals to eliminate taxation of Social Security benefits, end taxes on tips and overtime, impose tariffs, and expand deportations would all widen Social Security’s cash deficits.
Under the Center’s central estimate, it finds that President Trump’s agenda would:
Increase Social Security’s 10-year cash shortfall by $2.3 trillion through FY 2035.Advance insolvency by three years, from FY 2034 to FY 2031 – hastening the next President’s insolvency timeline by one-third.Lead to a 33% across-the-board benefit cut in 2035, up from the 23% CBO projects under current law.Increase Social Security’s annual shortfall by roughly 50% in FY 2035, from 3.6 to 4% of payroll.Require the equivalent of reducing current law benefits by about one-third or increasing revenue by about one-half to restore 75-year solvency.
Read Now: What Would the Trump Campaign Plans Mean for Social Security?
To learn more, watch Retirement Daily’s Learning Center: Social Security Primer.
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