For many retirees, Uncle Sam gives with one hand and takes away with the other. But that could soon change.
A bill introduced in the U.S. House of Representatives would exclude Social Security benefits from being classified as federally taxable income starting in 2025. Currently, about 40% of people receiving Social Security pay taxes on their benefits — if this passes, they would no longer do so.
The bill — called the “You Earned It, You Keep It Act” — was introduced by Rep. Angie Craig (D-Minn.) in late January. Here’s what you need to know about how Social Security works now, what the bill would change and where the bill stands.
How Social Security benefits are taxed now
Social Security benefits may be considered taxable income, despite the fact that Social Security represents income you were already taxed on during your working years. Half of your Social Security benefit is included in what the government calls your “combined income,” and that income is used to determine how much of your benefit is subject to federal tax.
If you file federal taxes as an individual and earn a combined income of:
- between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
- more than $34,000, up to 85% of your benefits may be taxable.
If you file federal taxes jointly and earn a combined income of:
- between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.
- more than $44,000, up to 85% of your benefits may be taxable.
Generally, income tax brackets are adjusted for inflation each year. However, Social Security hasn’t received the same courtesy for as long as it has been considered taxable income — 40 years. The thresholds above haven’t been changed since they were enacted in 1983. If they had been, the $25,000 to $34,000 threshold, for example, would be more like $75,000 to $100,000 today, an inflation calculator shows.
As a result, the number of retirees paying taxes on Social Security has ballooned over time. What affected less than 10% of recipients in 1984 now affects 40%.
The Social Security Administration says benefit taxation “usually happens if you have other substantial income in addition to your benefits” such as wages from work or investment income. But their definition of “substantial” might differ from yours — it often doesn’t take much income from any other source to trigger taxes on benefits.
What the bill would change
If passed into law, the You Earned It, You Keep It Act would eliminate federal taxes on Social Security benefits starting in 2025.
“This bill is a win-win – it’s a tax cut for seniors and a way to ensure more Americans can depend on the Social Security benefits they’ve earned. And on top that, it’s fiscally responsible,” Rep. Craig said in a press release.
How the bill would pay for itself
Eliminating a tax that’s been in place for 40 years could cause some concern, especially given the ongoing issue of Social Security trust funds always seeming to be on the verge of insolvency.
Fortunately, Craig’s legislation addresses the lost tax revenue. In fact, according to an assessment from the Social Security Administration itself, the bill would improve the solvency of Social Security and ensure the federal government is able “to pay scheduled benefits in full and on time for an additional 20 years.”
The bill would accomplish this by requiring people who earn more than $250,000 per year to pay Social Security taxes on amounts above that, starting in 2025. Currently, only the first $168,600 in earnings per year is subject to the taxes that fund Social Security.
What happens next?
The You Earned It, You Keep It Act is by no means guaranteed to become law and is in its earliest stages of the process.
Craig introduced a previous version of the bill in 2022, but it stalled in committees. Most bills never make it past that stage.
Assuming the 2024 bill passes committee, the next step would be for the full House of Representatives to vote on it. If the Senate then passes an identical version, the president could sign it into law.
In the meantime, to let your representative know how you feel about the legislation, contact them.
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