A small group of lawmakers wants to eliminate taxes on Social Security benefits as part of a proposal they say could help fund the declining 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 tax process: In addition to ending federal taxes on Social Security payments received by about 70 million Americans each month, the bill would also significantly increase the portion of someone’s wages subject to Social Security taxes social in a year. .
Currently, about 40% of beneficiaries pay taxes on Social Security benefits. Critics of this tax, which applies when an individual has an income of $25,000 or more, argue that it needlessly dilutes Americans’ retirement funds.
The bill, therefore, amounts to “a tax cut for seniors and a way to ensure that more Americans can depend on the Social Security benefits they have earned,” Craig said in a statement.
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 singles with incomes between $25,000 and $34,000 may have to pay federal taxes on up to 50% of their benefits. And up to 85% of benefits may 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 from 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 remain unaffected.
The You Earned It, You Keep It Act would also bring in more tax revenue by raising the cutoff point at which Americans will no longer be subject to payroll taxes going toward Social Security. Currently, the 6.2% Social Security tax applies to a maximum of $168,600 in wages. The bill would add Social Security taxes on earnings over $250,000.
Could changing taxes save Social Security?
In a recent analysis of Craig’s proposal, Stephen Goss, chief actuary of the Social Security Administration, said the bill would help Social Security remain solvent, buying two decades of time for a program they rely on heavily, among others, the elderly and people with disabilities. .
Social Security benefits are partially paid for with surpluses in trust funds that are projected to run out in 2034, at which time retiree benefits would be cut by 20%. Goss estimated that the projected exhaustion date could be pushed to 2054 if the bill were adopted.
This is not the first proposed solution. Over the years, other ideas for addressing Social Security funding problems have included reducing cost-of-living adjustments or changing the ages at which people can apply for Social Security. But any proposal that has the effect of reducing benefits tends to be unpopular, and legislation to that effect has not gained traction in Congress. (Craig, for example, also introduced his bill in 2022.)
Nicole Asher, senior vice president and senior wealth management advisor at Greenleaf Trust, says she favors the You Earned It, You Keep It Act because it would strengthen Social Security for decades by raising taxes on only a small portion of the population.
“I know higher income earners won’t be happy about this, but it makes sense for them to raise that cap,” Asher says.
While Craig’s bill likely won’t gain bipartisan support in its current form, Republicans have also considered eliminating taxes on Social Security benefits in other recent legislative proposals. For example, Rep. Thomas Massie, R-Ky., introduced a bill last May to end taxes on Social Security benefits, but it did not include any tax increases.
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