By now, we are all aware of President Trump’s tariffs — maybe not the specifics, but certainly their presence — and how they could lead to higher prices on items sourced overseas. To help soften the blow to American consumers, Trump has previously floated the idea of eliminating federal income taxes and using tariffs to help pay for government services. The idea might be a long shot, but if it does happen, it could have a major impact on both working Americans and retired ones.
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In 2024, Trump discussed the idea of an “all-tariff” policy in a private meeting with Republican lawmakers, Forbes reported. The idea is that if tariffs are high enough, it would offset the need for federal income taxes.
Whether such a move is feasible is uncertain, but there’s little doubt it would benefit most retirees, who are taxed in multiple ways on their income and investments. Here are some of the ways retirees currently pay income taxes and how they would be impacted by no taxes.
Although the IRS considers Social Security benefits “unearned” income, you might still owe income taxes on some of the money you get from the program. Roughly 40% of Social Security beneficiaries must pay federal income taxes on their benefits.
If Social Security is your only source of retirement income, you likely won’t face a tax bill. But if you have other income, there’s a good chance you’ll have to pay federal income taxes. Depending on your income, either 50% or 85% of your benefits are taxable.
If Trump wins a second term this year and eliminates income taxes, you’ll no longer have to pay any federal income taxes on your Social Security benefits. However, you might still face state income taxes on benefits depending on where you live.
According to the Financial Industry Regulatory Authority (FINRA), you pay income tax on your pension and withdrawals from any tax-deferred investments — including IRAs, 401(k)s and tax-deferred annuities — in the year you take the money.
For pension annuities and periodic pension payments, you might owe federal income tax at your regular tax rate. But if you take a direct lump-sum payout from your pension instead, you must pay the total tax due when you file your return for the year you receive the money. If you transfer a lump sum directly to an IRA, taxes will be deferred until you start withdrawing funds.
