When it comes to Social Security benefits, taxes can be a sensitive topic. Recently, just about anyone who will be receiving Social Security late in their lives has only applauded the [U.S. President himself](https://www.whitehouse.gov/briefings-statements/president-trump-proposed-deal-save-social-security-trust-funds/).
Proposed cuts in taxes on Social Security benefits have obviously drawn a lot of attention. The new rules could reduce future taxes and increase benefits if beneficiaries lose their jobs or retire early. Many individuals are responding enthusiastically to the prospect of collecting some money without paying Social Security taxes when they retire.
The Origins of Tax-Free Social Security Benefits
Currently, the United States uses a payroll tax levied on employees to fund Social Security programs. Payroll taxes can be used to pay retirement, survivor, and disability benefits to eligible individuals. Social Security levies both the employee and the employer for the amounts withheld from each employee’s paycheck.
Approximately 90% of Social Security recipients are exempt from taxes on up to 85% of their benefits. This implies that they may not need to pay tax on 85% of the full benefits they receive. This happens because there’s an earnings limit on how much taxes can be paid on Social Security benefits. Additionally, individuals who reach the age of 65 are eligible for the Social Security “full retirement age.”
How Trump’s Proposal Affects Social Security Tax Exemptions
President Trump has proposed that the $125,000 yearly income limit for exempt Social Security tax should be waived and that taxes on Social Security benefits should not exceed 85%. This change will obviously make it possible for more individuals to avoid paying taxes on the full benefits they get from Social Security, but it doesn’t necessarily look like it’s as effective in addressing the current high-income earners situation, who will now have the ability to avoid payment of taxes.
According to experts, this change is not going to have a huge impact on the budget of the Social Security trust funds, although this is going to tempt lots of cash-earning people, looking to be tax-free extremely high their income that’s really being pampered by this system.
Why Not Raise the Income Limit Instead?
Instead of making changes to how taxes are calculated on Social Security benefits, experts believe that a more impactful step would be to enlarge the income limitation on social security taxes.
Eligible for tax relief are employers that offer retirement benefits as part of their benefits package. In the United States, it’s the employee who pays 6.2 percent of their earnings in Social Security taxes, while the employer pays 6.2 percent more. That implies an 85% larger tax paid in comparison to how the overall tax rate is actually.
For low-income and middle-income individuals, disability and survivor Social Security benefits are seen as some method of relief in response to their income loss. For those who already reside below the 50th percentile of the national income, this relief may appear insignificant, but it’s still now considerably painful for middle-income individuals who might be getting reduced benefits.
Reducing Income from Social Security Taxes, what’s the Impact?
Extending [Roby Brock’s argument that 7 big companies saved over $490,000 in losses from positive taxes as a result of how negatively repeal among consumers translated into fallen share equity for E.I Retailers in 2019](https://www.arkansasbusiness.com/reports/2019/politics-with-no-governance-e-i-retailers-benefit/).
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