I had a sneaking suspicion that our once and possibly future president Donald Trump  was going to come up with another group to single out for tax exemption after his “no tax on tips” proposal.  I thought it might be first responders.  Silly me.  It was senior citizens, specifically those who are collecting social security.

“Seniors should not pay taxes on Social Security.  And they won’t.  They won’t.  There are the people, it’s up to you – no tax on social security”

To analyze “no tax on tips“, I had to make up a hypothetical waitress who worked 2,000 hours at the tipped employee federal minimum wage of $2.13 and received $30,000 in tips. She had three kids.  Then my partner had to create a return in Drake to run three scenarios.  We had the 2023 returns.  The first one was a baseline. The second was based on the Senate bill to exempt tips, which did not change her bottom line at all.  The second was on a House bill to exempt tips which, because of how the earned income tax credit works ended up costing the hypothetical waitress about $2,500 net and a possible reduction in future social security benefits. The House bill created some savings for her employer, so there is that.

The Social Security project was easier. I just asked my partner to rerun my return with no social security.  The change would save me about $3,000. In a similar scenario to the modestly earning waitress it would save someone who is just getting by on social security and nothing else exactly $0.

How Does Taxation Of Social Security Benefits Work ?

You can really learn about how the inclusion of social security in income works by studying this worksheet from IRS Publication 915.  I created a crude spreadsheet to fool around with the numbers, which I am not sharing because it is not ready for prime time.  None of the math is that hard, but the computations are a little tedious.

The basic concept is that something between 0% and 85% of your social security benefit is included in your taxable income. It is phased in based on a modified gross income number which is you regular adjusted gross income plus half your social security benefit plus some other items like tax-exempt interest and excluded foreign income.

Who Cares?

If you are not getting any reportable income other than social security none of your social security is includible in your gross income if you are single.  A married couple where both are receiving the absolute maximum of $4,873 monthly who have no other income, a fairly improbable scenario, would, by my reckoning, be taxable on $14,855 of their benefit.  Their standard deduction of $27,700 covers that nicely.  So retired people who are entirely dependent on social security don’t have an income tax problem,

A single person drawing the average social security check of $1,909 per month would have to have $40,000 in other income to be taxable on 85% of their social security.  It would start phasing in when they have around $13,000 of other income which when you consider the standard deduction has them in the 10% bracket. possibly moving up to 12%.

The bottom line is that reinstating the income tax exclusion for social security benefits which went away during the Reagan administration is not a great boon or any boon at all for struggling senior citizens getting by on just social security.  I might appreciate it particularly next year when I turn 73 and I have to start taking required minimum distributions, but I’m having the time of my life as a senior citizen and really don’t need another break.

This is very similar to the “no tax on tips”.  They are both proposals that purport to be directed toward a disadvantaged class, but will really only help the more advantaged members of the class like the servers in high-end steak house or in the case of senior citizens people like me or even more the older CPAs who are determined to die with their boots on.