Bill seeks to make Social Security benefits tax-free
For many retirees, Uncle Sam gives with one hand and takes away with the other. But that could soon change.
A bill introduced in the U.S. House of Representatives would prevent Social Security benefits from being classified as federally taxable income beginning in 2023. Currently, about half of people receiving Social Security pay taxes on their performances – if it works, they won’t do it anymore. .
The bill — called the “You Earned It, You Keep It Act” — was introduced by Rep. Angie Craig (D-Minn.). Here’s what you need to know about how Social Security works today, what the bill would do, and where the bill stands.
How Social Security benefits are taxed now
Social Security benefits can be considered taxable income, despite the fact that Social Security represents income that you were already taxed on during your working years. Half of your Social Security benefit is included in what the government calls your “combined income,” and this income is used to determine how much of your benefit is subject to federal tax.
If you file federal income tax returns as an individual and earn a combined income of:
- between $25,000 and $34,000you may have to pay income tax on up to 50% of your benefits.
- over $34,000up to 85% of your benefits may be taxable.
If you file federal income tax returns jointly and earn a combined income of:
- between $32,000 and $44,000you may have to pay income tax on up to 50% of your benefits.
- over $44,000up to 85% of your benefits may be taxable.
Generally, income tax brackets are adjusted for inflation each year. However, Social Security hasn’t been given the same courtesy since it’s been considered taxable income – nearly 40 years. The above thresholds have been modified since their promulgation in 1983.
As a result, the number of retirees paying Social Security taxes has ballooned over time. What affected less than 10% of recipients in 1984 now affects around half.
The Social Security Administration says benefit taxation “generally only occurs if you have other substantial income in addition to your benefits,” such as wages from work or investment income. But their definition of “substantial” may differ from yours – it often doesn’t take much income from another source to trigger taxes.
States can also tax benefits separately, although many do not. Check out our story, “26 States That Don’t Tax Social Security Benefits.”
What the bill would change
If enacted, the “You Earned It, You Keep It” law (HR 8717) will eliminate federal taxes on Social Security benefits beginning in 2023.
“Taxing the very benefits American workers have earned after decades of hard work diminishes our promise and threatens to undermine the financial security of retirees already struggling with rising prices,” Craig said in a press release.
How the bill would pay for itself
Eliminating a tax that has been in place for nearly 40 years could raise concerns, especially given the continuing problem with Social Security trust funds that still appear to be on the verge of insolvency.
Fortunately, the bill fixes the missing tax revenue. In fact, according to an assessment by the Social Security Administration itself, the bill would improve Social Security’s solvency and ensure that the federal government is able to “pay scheduled benefits in full and on time for 25 more years” beyond current levels.
It would achieve this by requiring people (as of 2023) who earn more than $250,000 per year to pay social security taxes on the higher amounts. Currently, only the first $147,000 of annual income is subject to the taxes that fund Social Security.
What happens next?
This proposal is by no means guaranteed to become law and is in its early stages of the process.
The bill was introduced on August 16 and has been sent for review by two congressional committees. Many bills never get past this stage, but assuming they do, the House of Representatives could then vote on the bill. If it passes the House — and the Senate passes an identical version — the president could sign it.
To let your representative know what you think of the legislation, contact them.
To learn more about the bill, see the latest full text.
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