Ending Federal Taxes on Social Security Benefits

Introduced by Representative Angie Craig and Senator Ruben Gallego, the You Earned It, You Keep It Act aims to remove federal taxation on Social Security benefits altogether. Under current law, up to 85% of Social Security income can be subject to federal taxes depending on a retiree’s income level.

If passed, retirees would be able to keep 100% of their Social Security benefits, rather than losing a portion to the IRS each year. To offset the lost tax revenue, the bill would reinstate payroll taxes for high earners specifically, those making more than $250,000 annually.

Clarifying Misconceptions About Previous Legislation

Some confusion has surrounded earlier laws like the OBB (Older Americans Budget Bill), which created a temporary senior deduction. However, that legislation did not repeal Section 86 of the Tax Code, which governs the taxation of Social Security benefits.

While OBB temporarily allowed seniors to deduct up to $6,000, it didn’t eliminate benefit taxation entirely. The new You Earned It, You Keep It Act directly targets Section 86 making this the first serious attempt in decades to fully repeal Social Security benefit taxation.

Key Changes Proposed by the Bill

Currently, retirees with income above certain thresholds $25,000 for singles and $32,000 for married couples may owe federal taxes on up to 85% of their benefits. These thresholds haven’t been adjusted for inflation since the 1980s, meaning more retirees pay taxes each year simply because of inflation.

The new bill would:

• Eliminate all federal taxes on Social Security benefits.
• Reinstate payroll taxes for earnings above $250,000 annually.
• Create a “donut hole” in the tax system, where income between the Social Security wage base and $250,000 remains untaxed.

This approach keeps middle-income earners protected while asking the wealthiest Americans to contribute more toward the system’s long-term stability.

Impact on High Earners and Benefit Structure

Under the proposal, high earners would once again pay into Social Security on income above $250,000. In return, they’d receive a modest 2% benefit credit on those additional contributions far less than the benefits earned on standard wages.

In other words, the bill makes the system more progressive: those who earn the most contribute more, while retirees living on fixed incomes finally keep their full benefits.

Financial Implications and Social Security Solvency

Supporters claim the proposal would extend Social Security’s solvency until roughly 2080, adding about 24 years to the program’s projected lifespan. While the Congressional Budget Office (CBO) has not yet issued an official scoring of the bill, early estimates suggest it could stabilize the trust fund without reducing benefits or raising taxes on middle-class retirees.

Planning Ahead: How This Could Affect Retirement Strategies

If the You Earned It, You Keep It Act passes, retirees and near-retirees would have new opportunities to optimize their tax planning:

• No taxes on Social Security would mean more flexibility in managing income from other sources.
• Roth conversions could become more efficient, as they’d no longer risk triggering taxes on benefits.
• Required Minimum Distributions (RMDs) could be taken strategically without pushing Social Security into taxable territory.

These changes would simplify retirement income planning for millions, especially those juggling IRA withdrawals, RMDs, and pension payments.

The Bill’s Current Status and Outlook

As of now, the You Earned It, You Keep It Act is not yet scheduled for a congressional vote. While the proposal has strong appeal among retirees, political divisions in Congress make its passage uncertain. If it fails, current rules will remain in place meaning up to 85% of benefits will continue to be taxable for many Americans.

Still, the conversation it has sparked is valuable. The bill underscores a growing recognition in Washington that retirees deserve to keep more of the benefits they earned, without being taxed twice on income they already paid into.

Bottom Line:
The You Earned It, You Keep It Act could mark a major shift in how Social Security is taxed, putting more money directly into retirees’ pockets while extending the program’s solvency. Even if it faces an uphill battle in Congress, it signals a step toward a fairer, simpler retirement system one where Americans truly get to keep what they earned.

All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.

The post The “You Earned It, You Keep It Act”: What Ending Taxes on Social Security Could Mean for Retirees appeared first on ROI TV.