In a bid to alleviate the tax burden on Social Security beneficiaries and fortify the financial standing of a crucial trust fund, a bipartisan Congressional bill has been reintroduced, promising a potential “win-win” scenario. However, despite its benefits, the bill is expected to face significant challenges on its journey to becoming law.
The legislation, known as the “You Earned, You Keep It Act,” was recently reintroduced by U.S. Representatives Angie Craig (D-Minn.) and Yadira Caraveo (D-Colo.). The primary goal of the bill is to eliminate federal taxes on Social Security benefits and extend the solvency of the program’s Old Age and Survivors Insurance (OASI) Trust Fund until 2054, as reported by Think Advisor.
Cutting Tax on Social Security Benefits: Keep Your Money
With projections suggesting a potential depletion of the OASI Trust Fund by 2033 or 2034, the bill seeks to ensure its financial stability through modifications to the taxation system. Presently, payroll taxes cover only 77% of benefits, and the proposed legislation recommends an expansion of Social Security payroll taxes to incomes exceeding $250,000. While taxes in 2024 apply to earnings up to $168,600, the Craig-Caraveo bill proposes a gradual increase in this cap until it surpasses $250,000.
The bill’s key provisions, as outlined by the Social Security’s Office of the Chief Actuary, could prolong the OASI fund’s ability to meet scheduled benefits for an additional 20 years. These findings were recently emphasized by the National Association of Plan Advisors (NAPA) in a blog post.
A significant feature of the proposed legislation is the elimination of federal income taxes on Social Security benefits. Currently, certain recipients are required to pay federal income taxes on their benefits based on their additional income. The bill aims to terminate this practice, offering extra financial relief to Social Security beneficiaries.
The Office of the Chief Actuary further asserts that the bill holds the potential to reduce the federal debt by an impressive $8.9 trillion over the next 75 years.
Do Any State Tax Social Security Benefits?
Thirteen states currently impose taxes on Social Security benefits, including Colorado, Connecticut, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Hampshire, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Each of these states follows its own taxation formula, with some taxing the entirety of Social Security benefits and others only taxing a portion. Additionally, these states may have varying tax rates based on different income levels.
The amount of tax applied to Social Security benefits depends on both one’s income and the state of residence. Generally, higher incomes result in higher tax obligations. To mitigate taxes on Social Security benefits, individuals can keep their income below the taxable threshold or consider relocating to a state that does not impose taxes on these benefits.
Taxing Social Security benefits carries significant implications for retirees, potentially reducing their overall income and creating financial challenges in meeting expenses or saving for retirement. In response to these concerns, there is an ongoing movement, both at the federal and state levels, aiming to eliminate the taxation of Social Security benefits. Several bills in Congress propose exempting these benefits from federal income tax, and various state-level initiatives are working towards the same goal.
Social Security Will Send Payments of up to $4,873 to Retirees in Days
The initial set of February Social Security payments, potentially reaching up to $4,873 for retirees who retired at the age of 70 with a substantial income, is scheduled for distribution. According to the Social Security Administration calendar, beneficiaries born between the 1st and 10th of any month will receive their first payment on February 14.
For those born after the 11th of any month, payments will be distributed in two waves on either February 21 or 28. The individual amount received is influenced by various factors, including the age at which they retired, their contributions to Social Security, and the duration of their contributions. The retirement age is a crucial determinant in establishing the maximum monthly benefit, with those retiring at 70 potentially receiving up to $4,873 monthly.
Conversely, individuals opting for the minimum retirement age of 62 can receive a maximum of $2,710 per month, while those retiring at the full retirement age of 67 may receive up to $3,822 monthly. It’s important to note that not all beneficiaries receive the maximum amount, and personalized estimates can be obtained through a Social Security calculator.