Is There a Bill in Congress to Stop Taxing Social Security?

Bills have been introduced in Congress to stop the taxation of Social Security benefits, a practice that began in 1984. This tax is a source of frustration for many retirees who feel they are being taxed on income they have already contributed to throughout their working lives. The initial laws were intended to affect only a small number of higher-income beneficiaries, but because the income thresholds were never adjusted for inflation, a growing percentage of recipients now find their benefits subject to federal tax.

How Social Security Benefits Are Currently Taxed

The taxation of Social Security hinges on a figure called “combined income,” also known as provisional income. This is calculated by taking your Adjusted Gross Income (AGI), adding any nontaxable interest, and then adding one-half of your Social Security benefits for the year. Your AGI includes taxable income like wages, pensions, and distributions from traditional retirement accounts, before standard or itemized deductions are subtracted. This combined income total is then compared against specific thresholds to determine if your benefits are taxable.

These income thresholds vary based on your tax filing status. For an individual filer with a combined income between $25,000 and $34,000, up to 50% of Social Security benefits may be subject to federal income tax. If an individual’s combined income exceeds $34,000, the taxable portion can increase to 85% of the benefits.

For married couples filing jointly, up to 50% of their benefits may be taxable if their combined income is between $32,000 and $44,000. If their combined income surpasses $44,000, up to 85% of their benefits could be taxed. These percentages do not apply directly to your benefits; instead, they represent the maximum portion of your benefits that can be added to your taxable income. The actual tax liability depends on your overall taxable income and tax bracket.

For example, a married couple with an AGI of $35,000 and $20,000 in Social Security benefits has a combined income of $45,000 ($35,000 AGI + $10,000 half of Social Security). Because this is over the $44,000 threshold, up to 85% of their benefits would be taxable. Retirees can request voluntary tax withholding from their benefits by submitting Form W-4V to the Social Security Administration, choosing a rate of 7%, 10%, 12%, or 22%.

Proposed Legislation to Eliminate the Tax

Several bills have been introduced in Congress to address this tax, with the most prominent being the “You Earned It, You Keep It Act.” This legislation proposes a complete repeal of the federal income tax on Social Security benefits by amending Section 86 of the Internal Revenue Code. If enacted, Social Security income would be entirely excluded from gross income for federal tax purposes.

A component of the “You Earned It, You Keep It Act” is a funding mechanism to offset the revenue loss from eliminating the tax. The proposal would alter how the Social Security payroll tax, or FICA tax, is applied to high earners. Currently, employees pay a 6.2% Social Security tax on earnings up to an annual maximum of $176,100.

The bill proposes to create a new tier of taxation. Under this plan, earnings between the current cap and $250,000 would remain untaxed for Social Security purposes. However, all earned income above $250,000 would again be subject to the 6.2% Social Security payroll tax. This change is intended to make the system more solvent while paying for the tax repeal.

Current Status and Legislative Outlook

The most recent version of the “You Earned It, You Keep It Act,” H.R. 7084, was introduced in the House of Representatives. The bill was then referred to the House Committee on Ways and Means and the House Committee on Energy and Commerce for review.

The bill must be reviewed, debated, and potentially amended by the committee members before it can be put to a vote. As of now, the bill remains in this early committee stage and has not been voted on by the full House of Representatives or the Senate, meaning it is far from becoming law.

The bill has garnered a number of cosponsors, indicating some support within Congress. However, it faces substantial hurdles, as major tax legislation often encounters partisan division. Proposals that alter the funding structure of Social Security are subject to intense scrutiny, and concerns about the bill’s fiscal impact make its future prospects uncertain.

Financial Implications of Repealing the Tax

The primary beneficiaries of this change would be retirees whose combined income exceeds the current taxation thresholds. Those with income below these levels do not pay federal tax on their benefits and would see no change in their tax liability. For middle- and higher-income retirees, the savings could be significant.

If the tax were repealed, a retiree’s taxable income would be lower, resulting in a direct reduction of their annual federal income tax bill. The exact savings would depend on their specific tax bracket and other financial details. This would represent a tangible increase in their disposable income.

Eliminating this tax would cause a substantial reduction in federal revenue. This revenue is currently directed to the Social Security and Medicare trust funds. Estimates suggest that repealing the tax could reduce federal revenues by approximately $1.2 trillion to $1.5 trillion over ten years. This loss of income would accelerate the projected depletion dates of the trust funds, potentially moving the Social Security insolvency date forward by at least a year.