Taxes
A House Democrat has proposed to eliminate tax on Social Security benefits. Here’s what that could mean for retirees and workers.
Feb. 12, 2024
By Katelyn Washington, Kiplinger Consumer News Service (TNS)
A proposal to end federal tax onSocial Securityretirement benefits would provide relief for retirees as early as next year. That’s because, as thebillis worded, federal taxes onSocial Securityincome would be eliminated beginning in 2025 (tax returns filed in early 2026). The You Earned It, You Keep It Act is referred to as a “win-win” by its sponsor, Minnesota Rep.Angie Craig(D-Minn.).
“It’s a tax cut for seniors and a way to ensure more Americans can depend on theSocial Securitybenefits they’ve earned,”Rep. Craigsaid in a release.
However, this isn’t the first time lawmakers have introduced legislation to end income tax onSocial Securitybenefits. So, will this bill pass this year, and what could happen if it does? Here’s what you need to know.
Bill to eliminate tax onSocial Security
Eliminating federal income tax onSocial Securityretirement benefits could benefit many retirees, especially those who receive other types of taxable income, such as from wages or distributions from retirement accounts. That’s because up to 85% ofSocial Securitybenefits are taxableat the federal level.
According to oneanalysisby theSocial SecurityOffice of the Actuary, provisions in the You Earned It, You Keep It bill would also benefit retirees (and otherSocial Securityrecipients) for decades. That’s because the bill would ensure payments could be made in full through 2054. That’s significantly longer than the current projection of theSocial Securityprogram becoming insolvent by 2034, based on a report from theSocial Securityand Medicare Boards of Trustees.
That same analysis finds that passing the proposed legislation would significantly reduce federal debt over the next several decades by nearly $9 trillion. That’s because eliminating the tax onSocial Securitybenefits would be paid for by increasing taxes on higher earners.
Social Securitytax increase
The proposed legislation calls for increasing theSocial Securitywage base, which means that high earners would help foot the bill for eliminating the federal tax on retirement benefits.
As Kiplinger reported, theSocial Securitytax wage base jumped 5.2% from 2023 to 2024.
- TheSocial Securitypayroll tax wage base was $160,200 last year.
- The wage base increased to $168,600 for this year, 2024.
But You Earned It, You Keep It would further increase the wage limit to over $250,000, which means that high earners could pay the 6.2% payroll tax on nearly $100,000 more of their wages.
Will the You Earned It, You Keep It bill pass?Because some provisions lack bipartisan support, it’s unlikely that You Earned It, You Keep It will pass as written. However, there is some bipartisan support for eliminating federal tax onSocial Securityretirement income.
State tax onSocial Securityin retirement
The proposed legislation only applies to federal income tax, so even if enacted, some retirees will still pay state income tax onSocial Securityincome.
The list of states that taxSocial Securityhas grown smaller in recent years. (Missouri and Nebraska stopped taxing Social Securitythis year). But nine states still taxSocial Securityas of 2024, one of which isMinnesota—the stateRep. Craigrepresents.
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All contents copyright 2024 The Kiplinger Washington Editors Inc. Distributed byTribune Content Agency LLC.
