President Donald Trump has pledged to eliminate federal taxes on Social Security benefits, and earlier this year, U.S. Rep. Thomas Massie, R-Ky., introduced a bill to do just that.
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According to researchers at the nonpartisan Committee for a Responsible Federal Budget, eliminating federal taxes on Social Security benefits would provide a tax break for many retirees. However, it could also increase federal deficits, accelerate the Social Security Trust Fund depletion and prompt future changes to benefits or tax policy.
Here’s how middle-class retirees should consider preparing for Trump’s Social Security tax plan. Plus find out the Social Security changes Trump has already made.
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Diversify Your Income Streams
Relying solely on Social Security can leave retirees vulnerable to policy shifts and rising living costs.
“Start tightening up discretionary spending now,” said Gregg Cummings, founder and CEO of Gregg Cummings Financial. “Create cushion. Build a flexible budget that assumes lower Social Security income, so you’re not caught off guard. If you’re not already tracking your spending, start.”
Creating multiple income streams can offer stability, flexibility and peace of mind — no matter what tax changes come.
“If Social Security becomes less predictable, you’ll need to rely more on your savings,” Cummings said. “You might need to pick up a part-time job, sell your house sooner or ease up on how much you’re pulling from investments.”
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Revisit Your Withdrawal Strategy
Proposed tax changes could affect how retirees draw from their retirement accounts.
While the elimination of Social Security taxes may lower taxable income, it’s also an opportunity to rethink the broader withdrawal plan.
“Start by modeling worse-case tax scenarios into your retirement budget,” said Christopher Stroup, founder and president of Silicon Beach Financial.
“Build in flexibility: Reduce taxable income by prioritizing Roth conversions, HSA contributions, or tax-efficient investments,” Stroup said. “If you’re current plan relies heavily on Social Security, reassess your withdrawal mix now before changes become law.”
Understand the Tax Implications
Even if Social Security benefits become tax-free in the future, retirees will still face tax liabilities on other income sources, such as 401(k) and IRA withdrawals, pensions and investment income. These can affect both your taxable income and your Medicare premiums.
“Most retirees are aware that federal and state taxes will be due on their traditional 401(k) and IRA distributions, but they are unaware of Provisional Income and IRMAA (Income Related Monthly Adjustment Amount),” said Colby Van Sickler, founder and CEO of F3 Wealth Management.
Provisional Income and IRMAA are formulas used to determine how much of one’s Social Security benefits are taxable and how income impacts Medicare premium surcharges.
If a proposal to eliminate federal taxes on Social Security benefits is enacted, the Provisional Income formula may no longer apply. However, IRMAA and taxes on other retirement income sources would still remain — making it important for retirees to revisit their tax strategy with a financial planner.
In addition, under current law, delaying Social Security benefits until full retirement age or later can increase lifetime payouts and may reduce the portion of benefits subject to tax.
“Delaying benefits until full retirement age or later might shield more income from taxes and increase lifetime payouts,” Stroup said. “Meanwhile, adjusting portfolio withdrawals to stay under key tax thresholds can improve after-tax outcomes.”
Stay Financially Grounded
While it’s tempting to plan around potential tax savings, financial experts caution against making major changes based on uncertain proposals. Instead, treat any tax breaks as a bonus — not the foundation of one’s retirement plan.
“Planning for a potentially higher Social Security benefit due to lower taxes has far more downside than upside,” said TJ Binkowski, founder of Narrow Road Financial Planning. “Treat it as found money. You’re excited to have it, but you don’t budget around hoping to find $20 on the ground each month.”
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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This article originally appeared on GOBankingRates.com: Here’s How Middle-Class Retirees Should Consider Preparing for Trump’s Social Security Tax Plan
