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Published: Feb 07, 2024 5 min read
Photo Illustration of a social security card, an envelope with money with percentage signs in the background
Money; Getty Images

A small group of lawmakers wants to eliminate taxes on Social Security benefits as part of a proposal they claim could help fund the flagging program.

Rep. Angie Craig, D-Minn., introduced the You Earned It, You Keep It Act in the House of Representatives in late January. It involves both sides of the taxation process: In addition to ending the federal taxes on the Social Security payments received by about 70 million Americans every month, the bill would also significantly increase how much of someone's wages are subject to Social Security taxes in a year.

Currently, about 40% of beneficiaries pay taxes on their Social Security benefits. Critics of this taxation, which applies when an individual has $25,000 or more of income, argue that it unnecessarily chips away from Americans' retirement funds.

The bill, therefore, amounts to "a tax cut for seniors and a way to ensure more Americans can depend on the Social Security benefits they’ve earned," Craig said in a statement.

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Who pays Social Security taxes?

Benefits are generally not taxed at the federal level for people whose only source of retirement income is Social Security. But single filers with between $25,000 and $34,000 of income may have to pay federal taxes on up to 50% of their benefits. And up to 85% of benefits can be taxable for people with incomes above $34,000.

(Note: The income thresholds are based on a unique definition of "combined income," which is different than your adjusted gross income.)

The bill would eliminate federal taxes on benefits at all income levels. State Social Security taxes — paid by some beneficiaries in nearly a dozen states, including Montana, Utah and Vermont — would be unaffected.

The You Earned It, You Keep It Act would also bring in more tax revenue by raising the cutoff point when Americans are no longer subject to payroll taxes that go toward Social Security. Currently, the 6.2% Social Security tax applies to a max of $168,600 of wages. The bill would add Social Security taxes on earnings above $250,000.

Could changing taxes save Social Security?

In a recent analysis of Craig's proposal, Stephen Goss, chief actuary at the Social Security Administration, said the bill would help Social Security stay solvent, buying two decades of time for a program heavily relied upon by older adults and people with disabilities, among others.

Social Security benefits are partially being paid with surpluses in trust funds that are projected to run dry in 2034, at which point retirees' benefits would be cut by 20%. Goss estimated the projected date of depletion would move back to 2054 if the bill were enacted.

This isn't the first proposed fix. Over the years, other ideas for addressing Social Security funding problems have included reducing the cost-of-living adjustments or changing the ages when people can file for Social Security. But any proposal that has the effect of reducing benefits tends to be unpopular, and legislation to that effect hasn't gone anywhere in Congress. (Craig, for instance, also introduced her bill in 2022.)

Nicole Asher, senior vice president and senior wealth management advisor at Greenleaf Trust, says she's in favor of the You Earned It, You Keep It Act because it would bolster Social Security for decades while only raising taxes on a small part of the population.

“I know that higher-income earners will not be happy about it, but it makes sense for them to increase that cap,” Asher says.

While Craig's bill probably won’t get bipartisan support in its current form, Republicans have also looked at the idea of eliminating taxes on Social Security benefits in other recent legislative proposals. For example, Rep. Thomas Massie, R-Ky., introduced a bill this past May to end taxes on Social Security benefits, but it did not include any tax increases.

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