New Bill Would Eliminate Federal Taxes on Social Security Benefits

Key Points

• Sen. Ruben Gallego has proposed a bill that would eliminate all taxes on Social Security benefits.

• The bill would also expand the Social Security payroll tax to apply to incomes over $250,000.

• According to experts, the plan could extend the Social Security trust fund’s ability to pay full benefits through 2058.

• The $23,760 Social Security bonus most retirees completely overlook ›

A great deal of thought goes into planning for retirement. For most, it means determining their sources of retirement income. And for 97% of older adults who either receive Social Security benefits or will receive them, Social Security is a critical part of planning. Unless Congress takes action, the Social Security trust fund will be depleted by 2034, causing the program to slash benefits by 19%.

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Earlier this month, Sen. Ruben Gallego, D-Arizona, introduced a bill called the You Earn It, You Keep It Act. In April, Rep. Angie Craig, D-Minnesota, introduced a House version of the bill. If it can gather enough support, the bill will permanently eliminate federal income taxes on Social Security benefits.

Here's what we know so far.

Image source: Getty Images.

The current tax burden

Currently, single Social Security recipients with a combined income of $25,000 to $34,000 and married couples who file jointly with a combined income of $32,000 to $44,000 may pay taxes on up to 50% of their benefits. Individuals with more than $34,000 in combined income or couples with more than $44,000 may pay taxes on up to 85% of benefits.

Gallego said in a statement, "Despite decades of paying into the system, seniors are still forced to pay taxes on their hard-earned benefits -- all while the ultra-wealthy barely pay into the system."

President Donald Trump's "big beautiful bill" provided some relief to those who are 65 or older. However, the bill isn't directly connected to Social Security tax liability, and its impact doesn't eliminate taxes on Social Security entirely. As part of the bill, adults aged 65 and over may be eligible to claim an additional deduction of up to $6,000. The full deduction is available to individual taxpayers with a modified adjusted gross income (MAGI) up to $75,000 and married couples filing jointly with a MAGI up to $150,000.

The deduction gradually phases out for taxpayers with a MAGI above those thresholds. The deduction is available to eligible taxpayers whether they take the standard deduction or itemize their returns. The fly in the ointment for taxpayers is that the deduction is temporary and ends after the 2028 tax year.

A permanent fix?

Unlike the $6,000 deduction for some taxpayers in the "big, beautiful bill," You Earn It, You Keep It directly eliminates federal taxes on Social Security benefits for all beneficiaries.

This will be welcome news for those concerned they'll never receive the Social Security benefits they've been promised, or worry they'll need to relocate to pay bills in retirement. While the "big, beautiful bill" may provide immediate relief to the middle class, it failed to include offsets for the reduced revenue from federal taxes on benefits. According to the Committee for a Responsible Federal Budget, the relief is expected to speed up the trust funds' depletion date.

However, according to Gallego's office, You Earned It, You Keep It will extend the Social Security trust funds' ability to pay full benefits for 24 years, until 2058. Social Security's chief actuary found the same to be true of Rep. Angie Craig's proposed bill in the House.

Here's why: The bill would expand the Social Security payroll tax to apply to annual earnings over $250,000, raising the maximum earnings subject to payroll taxes from $176,100.

Is change on the horizon?

Since Social Security cannot be changed through the budget reconciliation process, any major legislation like You Earned It, You Keep It would require bipartisan compromise to reach the necessary votes to pass it into law.

As Americans consider their retirement readiness and devise a withdrawal strategy for investments, it would be good to know whether they can count on Social Security. According to the Bipartisan Policy Center, a new poll shows that 93% of Americans consider Social Security a valuable federal program and 83% believe addressing challenges to the program should be a top priority for Congress.

There are all kinds of retirement plans, from employer-sponsored to investment plans for the self-employed. However, Social Security is at the heart of many retiree budgets, and it's clear that Congress is under pressure to ensure it's there for those who count on it.

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