No Tax On Social Security Benefits? Lawmaker Proposes New Bill

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About half of Social Security recipients pay income taxes on their benefits — but a recently-introduced bill aims to change that.

Last week, Sen. Ruben Gallego, D-Ariz., introduced the You Earn It, You Keep it Act, which would eliminate federal taxes on Social Security benefits. Rep. Angie Craig, D-Minn., introduced a version of the bill in the U.S. House of Representatives earlier this year.

The move comes just about two months after President Donald Trump signed the One Big Beautiful Bill Act into law. Despite Trump’s campaign promise to end taxes on Social Security benefits, the new law doesn’t do that. Instead, it includes a new bonus tax deduction for Americans age 65 and older, worth as much as $6,000 per taxpayer ($12,000 if married filing jointly and both spouses qualify).

How would the ‘You Earn It, You Keep it Act’ work?

If the new bill were to pass, taxes on Social Security benefits would be completely eliminated.

“Retirees who currently pay tax on up to 85 percent of their benefits would see simpler returns and lower federal taxes,” says Mark Gallegos, a CPA and tax partner at Porte Brown LLC in Chicago.

The bill would go further than the bonus deduction included in Trump’s bill earlier this year, which under current law is available only from 2025 through 2028.

So why didn’t Trump end the taxation of Social Security benefits in his “big, beautiful bill?” One reason is that the Senate budget reconciliation rules under which the bill was passed don’t allow for Social Security provisions, so lawmakers included the “senior deduction” instead, says Mark Luscombe, principal tax analyst with Wolters Kluwer Tax & Accounting.

How would the ‘You Earn It, You Keep it Act’ be paid for?

Under the proposed bill, the way in which the elimination of taxes on Social Security benefits would be paid for “may raise some objections,” Luscombe says.

The revenue would be replaced by applying the 12.4 percent Social Security payroll tax on earnings above $250,000. Currently, the maximum amount of income subject to Social Security payroll taxes is $176,100 (under current law that figure is adjusted yearly to account for inflation).

So high earners would shoulder higher payroll taxes (specifically OASDI tax), though they would also get a small benefit on those dollars: The bill would credit a small portion of those extra taxed earnings toward benefits via an added 2 percent factor on excess Average Indexed Monthly Earnings (AIME), Gallegos says. (AIME is used by the Social Security Administration to determine benefits.)

Senator Gallego says the move would allow the elimination of taxes on benefits without impacting the Social Security trust fund. In fact, the Social Security Administration’s actuaries estimate that, if passed, the law would even shore up the current system, extending the system’s ability to pay full benefits to 2058, a 24 year increase from the current estimate of 2034, according to an analysis by the Social Security Administration sent to Rep. Craig in April.

How Social Security benefits are taxed

Currently, up to 85 percent of retirees’ Social Security benefits are taxable, depending on income. Specifically, the calculation is based on the Social Security Administration’s definition of “combined income,” which is half of your Social Security income, plus all other income including tax-exempt interest.

For single filers:

• Up to 50 percent of Social Security benefits are subject to income tax if combined income is between $25,000 and $34,000.
• Up to 85 percent of benefits are subject to income tax if combined income exceeds $34,000.
• Benefits are not taxed for those with a combined income under $25,000.

For married filing jointly filers:

• Up to 50 percent of Social Security benefits are subject to income tax if combined income is between $32,000 and $44,000.
• Up to 85 percent of benefits are subject to income tax if combined income exceeds $44,000.
• Benefits are not subject to tax for those with a combined income under $32,000.

Is the ‘You Earn It, You Keep it Act’ likely to pass?

Republicans currently control both the House of Representatives and the Senate, making the odds of the act passing as a standalone bill slim.

That said, there are supporters. “This legislation provides long-overdue tax relief for seniors who have worked hard and paid into Social Security their entire lives,” said Shannon Benton, executive director of The Senior Citizens League, in a statement.

“Eliminating federal taxes on Social Security benefits is a commonsense step to ensure older Americans can keep more of what they’ve earned,” she said.

One possible path forward is if Republican leaders put it on their agenda — for example, as part of a broader Social Security solvency package, Gallegos says. However, he sees that as “doubtful” at this time.

“My guess is it will not move,” Luscombe adds.