You Earned It, You Keep It Act: Ending Taxes on Social Security Benefits
Congress is considering a major shift in retirement taxation through the proposed You Earned It, You Keep It Act, a bill that would eliminate federal taxes on Social Security benefits starting in 2026. For millions of retirees, this could mean keeping more of their hard-earned benefits each month. But the plan also comes with new rules for high-income earners to help offset the lost tax revenue.
Eliminating Federal Taxes on Social Security
Under current law, up to 85% of Social Security benefits can be taxable depending on income levels. This tax has long frustrated retirees, many of whom paid into the system for decades only to see a portion of their benefits clawed back at tax time. If the bill passes, beginning in 2026, Social Security benefits would become entirely tax-free at the federal level, a major change to retirement income planning.
How It’s Funded: Payroll Tax for High Earners
The proposal doesn’t erase taxes altogether it shifts them. Starting in 2026, a Social Security payroll tax would be reinstated for individuals earning more than $250,000 annually. Currently, wages above $176,100 are exempt from payroll taxes, but this bill creates what’s known as a “donut hole” where income between $176,100 and $250,000 remains untaxed. Any wages or self-employment income above $250,000 would once again be subject to payroll taxes.
Who Benefits Most?
- Middle- and upper-middle-income retirees: These groups currently pay the most in Social Security taxes and would see the largest benefit from tax-free payments.
- Lower-income retirees: Many already pay no federal taxes on their benefits, so their situation would remain largely unchanged.
- High earners: While they’d enjoy tax-free Social Security, they would also shoulder new payroll taxes on income above $250,000.
Extending Social Security Solvency
The bill claims it would extend Social Security solvency by an additional 24 years, pushing its projected stability to around 2088. However, the Congressional Budget Office has not yet scored the proposal, meaning the official financial impact remains uncertain.
Planning Ahead: What Retirees Should Do
If passed, the legislation could have significant implications for retirement planning:
- Adjust tax withholdings: With no federal tax on benefits, retirees may need to update their tax planning strategies.
- Consider Roth conversions: Eliminating Social Security taxes could free up flexibility for shifting pre-tax savings into Roth accounts.
- Account for IRMAA: Medicare’s income-related surcharges will still apply, so tax-free benefits won’t shield retirees from higher healthcare premiums if their income crosses certain thresholds.
Bottom Line
The You Earned It, You Keep It Act represents a meaningful win for retirees by eliminating federal taxes on Social Security benefits, but it comes with a trade-off for high earners. Whether it passes will depend on budget scoring and political momentum, but if enacted, it would change the way millions of Americans plan their retirement income.
All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.
