If passed, nobody would owe taxes on Social Security benefits starting in 2023.
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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 exclude Social Security benefits from being classified as federally taxable income starting in 2023. Currently, about half of people receiving Social Security pay taxes on their benefits — if this passes, they would no longer do so.
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 now, what the bill would do and where the bill stands.
Social Security benefits may be considered taxable income, despite the fact Social Security represents income 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 that income is used to determine how much of your benefit is subject to federal tax.
If you file federal taxes as an individual and earn a combined income of:
If you file federal taxes jointly and earn a combined income of:
Generally, income tax brackets are adjusted for inflation each year. However, Social Security hasn’t received the same courtesy for as long as it has been considered taxable income — nearly 40 years. The thresholds above have been changed since they were enacted in 1983.
As a result, the number of retirees paying taxes on Social Security has ballooned over time. What affected less than 10% of recipients in 1984 now affects about half.
The Social Security Administration says benefit taxation “usually only happens if you have other substantial income in addition to your benefits” such as wages from work or investment income. But their definition of “substantial” might differ from yours — it often doesn’t take much income from any other source to trigger taxes.
States can also separately tax benefits, although many do not. Check out our story, “26 States That Don’t Tax Social Security Benefits.”
If passed into law, the “You Earned It, You Keep It Act” (H.R. 8717) would eliminate federal taxes on Social Security benefits starting in 2023.
“Taxing the very benefits American workers have earned after decades on the job diminishes our promise and threatens to undermine the financial security of retirees already struggling with rising prices,” Craig said in a press release.
Eliminating a tax that’s been in place for nearly 40 years could cause some concern, especially given the ongoing issue of Social Security trust funds always seeming to be on the verge of insolvency.
Fortunately, the bill addresses the missing tax revenue. In fact, according to an assessment from the Social Security Administration itself, the bill would improve the solvency of Social Security and ensure the federal government is able “to pay scheduled benefits in full and on time for an additional 25 years” beyond current levels.
It would accomplish this by requiring people (starting in 2023) who earn more than $250,000 per year to pay Social Security taxes on amounts above that. Currently, only the first $147,000 in earnings per year is subject to the taxes that fund Social Security.
This proposal is by no means guaranteed to become law and is in its earliest stages of the process.
The bill was introduced on Aug. 16 and has been sent for consideration by two congressional committees. Many bills never move past this stage, but assuming it does, 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 into law.
To let your representative know how you feel about the legislation, contact them.
To learn more about the bill, check out the latest full text.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
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