‘Win-win’: A bill to eliminate taxes on Social Security benefits has been reintroduced — and it might keep the program afloat for 20 more years. Here’s how
A bill announced in the U.S. House could scrap federal taxes on Social Security benefits starting in 2025, while introducing a new funding stream that might keep the program going for an additional 20 years.
On Jan. 25, Rep. Angie Craig, D-Minn., reintroduced legislation, dubbed the “You Earned It, You Keep It Act,” that would repeal the taxation of Social Security benefits, putting money back into the pockets of retirees.
In addition, an analysis of the bill from the Social Security Administration shows how changes in financing would allow the agency to continue making payments in full through 2054, which is 20 years longer than current projections.
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“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,” Craig said in a press release.
Here’s how the bill would work.
New financing
The big change in the bill with how benefits are financed has to with the Social Security payroll tax. Employers and employees each pay tax on 6.2% of wages up to a maximum of $168,600 in 2024 — the self-employed pay 12.4% in taxes. The proposed bill would kick the payroll tax back into gear once earnings exceed $250,000, leaning on high earners to increase funding.
These financing measures might allow retirees to afford enjoying their full Social Security benefits. At present, folks with a combined income — which includes your adjusted gross income, plus nontaxable interest, plus half of your Social Security benefits — of $25,000 or more (and couples filing jointly with a combined income of $32,000 or more) currently pay taxes on at least 50% of their benefits. The bill would eliminate these taxes.
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According to the SSA, about 40% of people who receive Social Security benefits end up paying taxes on them each year.
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Inflation is ‘eroding’ benefits
The Social Security Old-Age and Survivors Insurance Trust Fund is currently projected to run low by 2033, which means retirees are expected to receive about 77% of their benefits at that time. If the bill is passed, and the SSA analysis is correct, benefits would be fully funded until 2054.
Many depend on these benefits, but despite a 3.2% cost-of-living adjustment to Social Security payments this year, some beneficiaries aren’t convinced the monthly checks will be enough to account for the increased cost of basic goods, which are up 3.1% compared to a year ago, according to the latest Census Bureau numbers.
For these folks, a tax break on benefits may go a long way. A retired elementary school teacher, Sally Hokkanen, told Fox 9 Minneapolis-St. Paul that she and her husband rely on Social Security payments and their 401(k)s to make ends meet.
“Most of it goes to rent and transportation,” Hokkanen said, adding that she’d love to use the extra money to travel if the tax on Social Security benefits gets eliminated with the “You Earned It, You Keep It Act.”
“Historic inflation is eroding seniors’ budgets, jeopardizing the financial security they’ve worked their whole lives to achieve,” Rep. Yadira Caraveo, D-Colo., who co-sponsored the bill, said in a news release. “The last thing they need is for the government to double tax their hard-earned Social Security benefits.”
The reintroduced bill was originally announced in August 2022.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.