Social Security benefits could see a major shift in federal tax treatment if former President Donald Trump’s proposal to eliminate federal income tax on these payments gains traction.
The announcement has reignited debate over how retirement income should be taxed, especially for millions of older Americans who rely heavily on Social Security as a primary source of income.
According to The Motley Fool, although the proposal remains politically uncertain, it could reshape financial planning for retirees nationwide.
In the meantime, it remains essential for recipients to understand how their benefits are taxed under current federal guidelines and what their specific state rules entail.
How Social Security Benefits Are Taxed at the Federal Level
Federal taxation on Social Security is based on a calculation known as combined income, which includes:
- Adjusted gross income (AGI) from sources other than Social Security
- Nontaxable interest, such as municipal bond yields
- Half of the annual Social Security benefits
For example, a retiree with an AGI of $20,000, $500 in nontaxable interest, and $20,000 in benefits would have a combined income of $30,500. According to current IRS rules, this places the taxpayer in a range where up to 50% of benefits could be taxable.
Thresholds vary based on filing status:
| Filing Status | Combined Income Range | Percentage of Taxable Benefits |
|---|---|---|
| Single | <$25,000 | 0% |
| Single | $25,000–$34,000 | Up to 50% |
| Single | >$34,000 | Up to 85% |
| Married (joint) | <$32,000 | 0% |
| Married (joint) | $32,000–$44,000 | Up to 50% |
| Married (joint) | >$44,000 | Up to 85% |
The taxable portion of benefits is then included in gross income and taxed at regular rates.
Most States Do Not Tax Social Security Benefits
While federal tax may still apply for now, 41 states and Washington, D.C. do not impose state income tax on Social Security benefits. That leaves nine states where some form of taxation remains:
- Colorado
- Connecticut
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Each of these states applies its own rules and thresholds. Some, like Colorado, offer exclusions or age-based adjustments. Others apply income-based exemptions.
States Are Gradually Moving Away From Taxing Benefits
Recent policy trends indicate that states are steadily removing taxes on Social Security. Kansas, Missouri, and Nebraska have recently repealed such taxes.
In West Virginia, a phased repeal is already in motion. For tax year 2024, 35% of Social Security benefits are exempt. In 2025, that rises to 65%. By 2026, benefits will be fully exempt from state taxation for all income levels.
Uncertainty Remains Over Trump’s Federal Tax Proposal
In March, Donald Trump reiterated his commitment to ending the federal tax on Social Security. He framed the proposal as a means to improve retiree income and stimulate economic activity.
However, a presidential proposal alone is insufficient. Congressional approval is required, necessitating majority votes in both chambers. Without that, any change is unlikely to take effect in the near term.
Critics of the plan argue that eliminating the tax could reduce funding for the Social Security Trust Fund, raising long-term sustainability concerns. Supporters believe retirees deserve full access to their benefits without further tax burdens.
Until legislative action occurs, retirees should continue to assess their combined income annually to determine federal tax obligations. Additionally, checking specific state-level rules can clarify whether benefits will be taxed locally.
