Currently, politicians are trying to extend the Tax Cuts and Jobs Act, which originally passed in 2017 during the first Trump administration. In fact, the House of Representatives recently passed a bill supporting a $4.5 trillion tax cut. While this bill still needs to pass through Congress, it is possible it could reach the president’s desk as soon as April 2025. Naturally, this raises questions about what it could mean for you and your retirement. In this article, we’ll go over the top three things to be aware of if this bill becomes law.
Contents
Here is what the $4.5 Trillion Tax Cut Means for Your Retirement Savings:
Many people don’t realize that under current law, up to 85% of Social Security benefits can be taxable, depending on your income. This taxation is applied at your marginal tax bracket. However, this wasn’t always the case. In 1983, under President Reagan, legislation was passed that introduced taxation of Social Security benefits, which took effect in 1984. Since then, many retirees have paid tax on a portion of their benefits.
When you look at the gross number on your Social Security statement, it’s important to remember that you may receive significantly less once you account for Medicare premiums and taxes. For example, the average annual Social Security benefit is around $21,000. Many recipients pay about $4,000 in taxes annually on that benefit. If your benefit is higher, your tax liability could also be higher. And since this is calculated per individual, married couples could pay double.
If a bill eliminating taxes on Social Security benefits were to pass, it could represent a substantial boost in net retirement income. That could mean thousands, or even tens of thousands, more for some households. While this proposal is being viewed favorably by many, it’s worth noting that the long-term solvency of the Social Security system remains uncertain. Projections currently suggest it could face funding challenges by 2034. These issues will likely be addressed by future legislation, but in the short term, this potential change could offer meaningful relief for retirees.
2) Cap on Prescription Drug Costs
Another change already in effect in 2025 is a cap on prescription drug expenses. Passed as part of the Inflation Reduction Act under the Biden administration in 2022, this policy limits the out-of-pocket expense for prescription medications to $2,000 annually for Medicare beneficiaries.
While $2,000 may still feel like a sizable cost, it represents a major improvement for many retirees. At REAP Financial, we’ve seen clients previously paying between $7,000 and $10,000 per year on prescriptions. This cap could free up funds in their retirement budgets and help support broader financial security in retirement.
3) Tax Rates Steady
If the current tax cuts are extended, income tax rates could remain at historically low levels. In fact, depending on the final language of the bill, some tax rates may even improve slightly. Current tax brackets are among the lowest in the past four decades, which could be beneficial for both retirees and those still earning income.
This potential legislation may also impact estate tax limits. For individuals with considerable assets or large estates, estate tax exposure remains a concern. While this bill may not directly reduce estate tax rates, it’s important to monitor whether current thresholds remain intact or change in the years ahead. Presently, estate tax limits are historically high, but that could shift without additional legislation.
If you’d like to stay up to date on retirement tax changes, Medicare rules, and financial planning strategies, request our free tax guide. Just send an email to retire@reapfinancial.com and mention “YouTube Tax Guide” in the subject line. We’ll send the latest version directly to your inbox.
Learn More About How REAP Financial Can Help with Retirement Planning
Interested in how these changes could affect your retirement income strategy? At REAP Financial, our fiduciary advisers in Austin, TX help individuals and families navigate tax planning, retirement income strategies, and financial planning with clarity and confidence. Schedule a no-cost consultation today by emailing retire@reapfinancial.com and let us help you plan for what’s next.
Contact REAP Financial for Retirement Planning in the Austin Area
Phone: (512) 249-7300
Email: retire@reapfinancial.com
Office Address: 9414 Anderson Mill Rd #100, Austin, TX 78729
Chris Heerlein, a Texas native, is the CEO of REAP Financial and founder of REAP Private Client Group (RPCG), specializing in wealth creation, preservation, and growth for affluent individuals, business owners, and executives. RPCG provides expert financial and investment advice, advanced tax strategies, business succession planning, and unparalleled client service. Chris is a trusted financial advisor, author of Divorce With Dignity (2019) and Money Won’t Buy Happiness But Time to Find It (2017), and a columnist for Kiplinger Personal Finance Magazine.
He has been featured in Fortune, Money Magazine, Bloomberg Businessweek, and U.S. News & World Report. Chris also hosts Wealth Radio on NewsRadio KLBJ and is a sought-after speaker. Based in Austin, Texas, he lives with his wife, Hannah, and their three children and actively supports charitable causes.
