Taxes on Social Security benefits are just one of the financial worries of retirees. A new bill proposes to completely end them, starting next year. (Photo by Getty Images for Unsplash+)
The campaign promise was straightforward. The tax law reality, not so much.
Donald Trump told voters he wanted to eliminate the current tax on Social Security benefits. Right now, some retirees who get money from sources other than the federal retirement program must pay tax on part of their Social Security.
But when the final version of the One Big Beautiful Bill (OBBB) Act that became law on July 4, it didn’t end tax on Social Security. Instead, it created a temporary extra tax deduction, the Senior Bonus, for older filers.
A lot of retirees don’t think that unkept campaign promise is good enough. Some members of Congress agree, and have introduced yet another bill that would end the tax on Social Security for some older taxpayers.
Ending the tax totally: The You Earned It, You Keep It Act is the latest legislative attempt to provide Social Security recipients with tax relief. Sen. Ruben Gallego (D-Arizona) introduced the upper chamber’s version on Sept. 4.
A House version was introduced in April by Rep. Angie Craig (D-Minnesota).
The proposal now before both Congressional bodies would permanently abolish federal taxes on Social Security benefits. That’s it. Just cut it out of the Internal Revenue Code.
“Like a lot of Americans, I’ve been paying into Social Security since my first job at fourteen. But despite decades of paying into the system, seniors are still forced to pay taxes on their hard-earned benefits – all while the ultra-wealthy barely pay into the system at all,” Gallego said in a statement issued when he announced his bill.
“Trump claimed he ended taxes on Social Security. My bill actually does it. Permanently,” Gallego added.
The tax would end starting in 2026. That would mean Social Security recipients would see the tax benefit on the returns they file in 2027.
Making up lost revenue: One area of potential pushback is the loss of revenue if the Social Security tax is eliminated.
You Earned It, You Keep It would make up for the missing money by increasing the Social Security taxable wage base. This year, that’s $176,100. The Social Security Administration this fall will announce the cost-of-living increase for the 2026 tax year.
These earnings are subject to the 6.2 percent Social Security payroll tax. Workers who make more than the annual wage base, do not have that Federal Insurance Contributions Act (FICA) tax withheld. For your information, there’s no wage limit on the 1.45 percent payroll tax that goes toward Medicare.
The Gallego-Craig bill would, starting in 2026, make all wages above $250,000 subject to the Social Security payroll tax. These higher earners’ continued contributions would help offset the revenue lost by ending the tax on Social Security benefits.
Gallego said projections show the expanded Social Security payroll tax collections on higher earners also would mean beneficiary payment could be made without cuts until at least 2058. That’s 24 years longer the current solvency deadline.
Current Social Security tax law: The IRS has been collecting from some Social Security recipients since 1984. That year, the Congress passed and Republican President Ronald Reagan signed into law a package of tax changes known as the 1983 Amendments.
The new law meant that up to one-half of previously untaxed Social Security benefits were potentially taxable income.
Then a decade later, taxes on Social Security benefits increased. Democratic President Bill Clinton’s signing of the 1993 Omnibus Budget Reconciliation Act (OBRA) into law added the 85 percent taxability possibility for higher-income beneficiaries.
Just how much tax the IRS takes depends on a person’s total retirement take. Defined a combined income, this is the filer’s adjusted gross income (AGI), tax-free interest, and half of the recipient’s Social Security benefits.
When that combined income is between $25,000 and $34,000 for a single Social Security recipient (or between $32,000 and $44,000 for older married joint filers), up to 50 percent of their government retirement payments are taxed at ordinary tax rates, which range from 10 percent to 37 percent.
Make more and Uncle Sam will take more. Older single filers whose combined income exceeds $34,000 (or $44,000 for jointly filing senior married couples) are taxed on up to 85 percent of their benefits.
If you’re thinking that the earnings triggers aren’t that large, you are not alone. A whole lot of older Social Security receiving filers are not happy that combined earnings amounts have never been indexed for inflation. They argue that they shouldn’t be penalized for being responsible and making added retirement income instead of depending on the government benefits alone.
Legislative outlook: Moderate- to higher-earning Social Security recipients no doubt welcome the effort from Gallego and Craig to provide them tax relief.
But will it succeed? I’m thinking no.
True, Congressional Republicans would like to maximize the time they are in total control on Capitol Hill, so they are talking about another tax bill before the end of the year.
If the GOP is able to do that, the true no tax on Social Security measure could be a part of it.
There also are tax provisions that didn’t make it into the OBBB and expire at the end of 2025. These temporary tax breaks are known as extenders because they typically are renewed, often just before their Dec. 31 deadlines. It’s possible that Congress could pass an extenders bill with the Gallego-Craig proposal in it before they leave for the year-end holiday.
Many lawmakers, however, including a group of deficit-hawk Republicans, are still worried about the federal debt. They pushed back (a little) during the OBBB debate, but conceded to political pressure to pass the bill that massively expands the country’s debt load.
One calculation projects that the new law’s tax breaks will increase the federal deficit by $3.4 trillion over the next decade. Add in the interest on the national debt, and the total cost could exceed $4 trillion.
And even though the Gallego-Craig bill would address the deficit concern by offsetting the elimination of taxes on Social Security with the new wage base tax, the Republican Party generally is opposed to raising taxes. A hike on a powerful segment of their constituency — yeah, I’m talking about the rich — probably wouldn’t be embraced by those members.
Still, it’s Congress, where the saying “you never know” is the legislative branch’s unofficial motto.
You also might find these items of interest:
- New tax law adds to Social Security’s financial worries
- Proposed new Social Security COLA CPI, wage base cap phaseout
- The current federal tax on Social Security benefits and efforts to end it
