When tax time rolls around each year, some older Americans are surprised to discover that a portion of their Social Security benefits are taxable. Since the government doesn’t automatically withhold taxes from benefits, it could mean some beneficiaries owe the IRS in April.
Meanwhile, the Social Security trust funds are slowly running dry, and the Old-Age and Survivors Insurance Trust Fund — which pays out retirement benefits — will be depleted in 2033, according to current estimates. After that, the Social Security system will only be able to pay out 79% of retirement benefits owed, according to a recent report from the Trustees of the Social Security and Medicare trust funds.
“The system is a mess, and it’s underfunded and needs reform and no one wants to do it,” says Brett Walters, a financial planner with TBH Advisors in Brentwood, Tennessee.
However, with a Social Security shortfall looming, legislators may feel more pressure to come up with a fix. One bill introduced this year aims to prop up the trust fund balance while also providing a tax break to Social Security beneficiaries.
[READ: How Raising the Retirement Age Could Help or Hurt Seniors]
What Is the Bill That Would Eliminate Social Security Taxes?
The You Earned It, You Keep It Act was introduced in January by Democratic Rep. Angie Craig of Minnesota. The bill contains two main provisions:
— Elimination of federal income tax on Social Security benefits
— Assessment of Social Security payroll taxes on incomes of $250,000 or more
For 2025, Social Security payroll taxes will be assessed on incomes up to $176,100. The 12.4% tax is split between employers and employees. Self-employed workers are responsible for paying the entire amount themselves.
As currently written, the bill would create a doughnut hole of income that is exempt from Social Security payroll taxes, according to Bill Smith, national director of tax technical services for financial firm CBIZ MHM in Reston, Virginia. For instance, if the law were in effect for 2025, high-income workers would pay Social Security payroll taxes on the first $176,100 of their income, no Social Security tax on income from $176,101 to $249,999, and then the tax would be assessed for income in excess of $250,000.
Those extra payroll taxes would help prop up the Social Security trust fund while the bill’s other provision — eliminating the federal income tax on benefits — could put money back into the pockets of older Americans.
“The name (You Earned It, You Keep It) might be a little misleading to some,” says Michele Frank, associate professor of accountancy at Miami University in Oxford, Ohio. She notes that because of current income thresholds, only about 40% of Social Security beneficiaries see a portion of their benefits taxed. “It’s not like everyone is going to get a big tax break,” she says.
[Related:When You Need to Pay Taxes on Social Security]
Extending Solvency of the Social Security Trust Funds
As proposed, the You Earned It, You Keep It Act would allow Social Security to keep making all scheduled payments in full through 2054, according to an analysis by the Office of the Chief Actuary in the Social Security Administration. After that point, Social Security would only be able to pay 91% of owed benefits.
“Arithmetic is going to catch up with this,” Walters says. While the act extends the solvency of the trust fund, he thinks any permanent solution will have to involve either pushing back the full retirement age or reducing benefits.
Walters notes that the bill will also require transfers from the general fund to the Social Security trust funds to make up for any loss of revenue from the elimination of taxes on Social Security benefits. The bill’s analysis found its provisions could be expected to reduce federal debt held by the public by $8.9 trillion over a 75-year period, although general fund transfers could add to the gross federal debt.
“I don’t think the government is ever going to let Social Security fail,” Smith says. However, he notes there are still many Republicans from the Ronald Reagan era who remember when the tax on benefits was implemented in 1984 as a way of addressing a shortfall in the Social Security system. They may not be likely to support its repeal.
[Related:5 Ways to Minimize Taxes on Retirement Income]
Skepticism About the Bill’s Chance of Passage
The You Earned It, You Keep It Act is awaiting action in the House Committee on Ways and Means. It has also been referred to the House Committee on Energy and Commerce for consideration and isn’t likely to see any action this year.
“It didn’t have bipartisan sponsorship, which makes for an uphill struggle in the House,” Smith says. All nine co-sponsors of the bill are Democratic members of the House.
What’s more, it would break President Joe Biden’s pledge not to raise taxes on people earning less than $400,000. As written, it would raise Social Security payroll taxes for those making more than $250,000 per year.
After the new year, any bill not passed will need to be reintroduced for further consideration. While President-elect Donald Trump has stated his support for eliminating taxes on Social Security benefits, it seems unlikely a Republican-controlled House and Senate would pass a bill identical to the You Earned It, You Keep It Act. Republican legislators have historically balked at the idea of raising taxes.
However, Republican voters aren’t as opposed to the idea. A 2024 survey by the University of Maryland’s Program for Public Consultation found that 87% of U.S. adults — including 86% of Republican respondents — support making all income in excess of $400,000 subject to the payroll taxes that help fund Social Security.
While the You Earned It, You Keep It Act doesn’t seem destined to become law, “overall, it’s a good place to start a conversation,” Walters says. He adds that it would be better for Congress to address the looming Social Security shortfall sooner rather than later. “The longer we wait, the larger the reforms.”
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Trump Proposed Eliminating Social Security Taxes. Here’s the Bill That Could Make It Happen. originally appeared on usnews.com
Correction 04/30/24: A previous version of this story incorrectly stated that the bill would reduce federal debt by $8.9 trillion over a 75-year period. It will reduce federal debt held by the public by $8.9 trillion over a 75-year period, although general fund transfers may add to the gross federal debt.
Update 12/13/24: This story was previously published at an earlier date and has been updated with new information.
