A proposal aiming to terminate federal taxation on Social Security retirement benefits could bring relief to retirees as soon as next year. According to the current wording of the bill, federal taxes on Social Security income would cease starting in 2025 (with tax returns filed in early 2026). Dubbed the “You Earned It, You Keep It Act,” by its sponsor, Minnesota Representative Angie Craig (D-Minn.), the proposal is hailed as 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,” remarked Rep. Craig in a release. Nevertheless, this isn’t the inaugural attempt by lawmakers to introduce legislation aimed at eliminating income tax on Social Security benefits. So, the looming question is: will this bill gain approval this year, and what ramifications could ensue if it does? Here’s what you should know.
Legislation Aiming to Eradicate Taxation on Social Security
The proposal to eradicate federal income tax on Social Security retirement benefits holds potential benefits for numerous retirees, particularly those with other taxable income sources like wages or retirement account distributions. This is particularly significant as up to 85% of Social Security benefits are currently subject to federal taxation.
An analysis conducted by the Social Security Office of the Actuary indicates that the provisions outlined in the You Earned It, You Keep It bill could have lasting positive effects on retirees and other Social Security recipients. Notably, the bill is projected to sustain full payments through 2054, a substantial extension beyond the current forecast of Social Security insolvency by 2034, as outlined in a report from the Social Security and Medicare Boards of Trustees.
Moreover, this analysis suggests that enacting the proposed legislation could substantially alleviate federal debt over the coming decades, potentially reducing it by nearly $9 trillion. This fiscal relief would be facilitated by offsetting the elimination of Social Security benefit taxes through increased taxation on higher earners.
Proposal to Raise Social Security Wage Base
The proposed legislation includes a provision to raise the Social Security wage base, aiming to enlist higher earners in financing the elimination of the federal tax on retirement benefits. According to a report by Kiplinger, the Social Security tax wage base saw a 5.2% increase from 2023 to 2024. Last year, the wage base stood at $160,200, and for the current year, 2024, it has risen to $168,600.
However, the You Earned It, You Keep It bill proposes a further increase in the wage limit to over $250,000. This would entail high earners contributing the 6.2% payroll tax on nearly $100,000 more of their wages.
As for the prospects of the You Earned It, You Keep It bill passing, the presence of bipartisan support for eliminating the federal tax on Social Security retirement income suggests that while certain provisions may lack bipartisan consensus, there remains a possibility of progress in this area.
Taxation of Social Security Benefits at the State Level in Retirement
It’s important to note that the proposed legislation solely addresses federal income tax implications, implying that even if implemented, certain retirees may continue to be subject to state income tax on their Social Security income.
Over the past years, the roster of states levying taxes on Social Security benefits has dwindled. Notably, Missouri and Nebraska ceased taxing Social Security this year. However, as of 2024, nine states still impose taxes on Social Security benefits, including Minnesota—the state represented by Rep. Craig.