For many retirees, Uncle Sam gives with one hand and takes with the other. But that may soon change.
A bill introduced in the U.S. House of Representatives would exclude Social Security benefits from federal taxable income starting in 2023. Currently, about half of those who receive Social Security pay taxes on their benefits — and if it passes, they won’t do so again.
The bill — called “You Earn It, You Keep It” — was introduced by Rep. Angie Craig (D-Minnesota). Here’s what you need to know about how Social Security works now, what the bill will do, and where it stands.
How Social Security benefits are taxed now
Social Security benefits may be considered taxable income, although Social Security represents income that has been taxed while you were working. Half of your Social Security benefits are included in what the government calls “consolidated income,” which is used to determine how much of your benefits is subject to federal taxes.
If you file federal taxes as an individual and receive the following combined income:
- Between $25,000 and $34,000you may be required to pay up to 50% income tax on your benefits.
- over $34,000up to 85% of benefits may be taxable.
If you file a joint federal tax return and receive the following combined income:
- Between $32,000 and $44,000you may be required to pay up to 50% income tax on your benefits.
- over $44,000up to 85% of benefits may be taxable.
Generally, income tax brackets are adjusted annually for inflation. However, as long as Social Security has been treated as taxable income — for nearly 40 years, it hasn’t received the same treatment. The above thresholds have changed since they were enacted in 1983.
As a result, the number of retirees paying Social Security taxes has ballooned over time. Grants that affected less than 10 percent in 1984 now affect about half.
The Social Security Administration says the benefit tax “generally only occurs if you have other substantial income in addition to benefits,” such as work wages or investment income. But their definition of “substantial” may be different from yours – generally you don’t need much income from any other source to trigger the tax.
States can also tax benefits individually, although many do not. Check out our story, “26 States That Don’t Tax Social Security Benefits.”
what the bill will change
If passed into law, “You Earn, You Keep” (HR 8717) would eliminate federal taxes on Social Security benefits starting in 2023.
“Taxing the benefits American workers receive after decades of work undermines our commitment and threatens to undermine the financial security of retirees already struggling with rising prices,” Craig said in a release. .”
How the bill pays for itself
Removing a tax that has been in place for nearly 40 years could raise some concerns, especially given the ongoing problems with the Social Security trust fund, which always seems to be on the verge of bankruptcy.
Fortunately, the bill addresses the tax-missing problem. In fact, according to the Social Security Administration’s own assessment, the bill would improve Social Security’s solvency and ensure that the federal government is able to pay its scheduled benefits “on time and in full for 25 years” based on current levels.
It will do this by requiring people earning more than $250,000 a year (starting in 2023) to pay Social Security taxes for those above that amount. Currently, only the first $147,000 of income is subject to Social Security taxes each year.
What happens next?
The proposal is by no means guaranteed to become law and is at the earliest stages of the process.
The bill was introduced on August 16 and has been submitted to two congressional committees for consideration. Many bills never get past this stage, but assuming it does, the House can vote on the bill. If it passes the House — and the Senate passes the same version — the president can sign it into law.
To let your representatives know your views on the legislation, please contact them.
To learn more about the Act, please view the latest full text.
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