A new bill has been introduced in Congress that could significantly alter the Social Security payroll tax structure in the United States. According to recent news, the bill aims to simplify the retirement payment process, which could drastically change the Social Security payroll tax landscape. The proposed law, submitted last week, stipulates that state income tax would not apply to Social Security benefits.
The Social Security income tax would be gradually phased out over eight years if the bill is approved, starting next year and expiring in 2034. Under the current system, individuals earning less than $50,000 and couples earning less than $65,000 are exempt from paying taxes on Social Security benefits. However, some older Americans are often surprised to find that part of their Social Security income is taxable, leading some beneficiaries to owe taxes to the IRS each April since the government does not withhold taxes from benefits by default.
Adding to the urgency, the Old-Age and Survivors Insurance Trust Fund, which pays out retirement benefits, is predicted to run out of money by 2033. After that, the Social Security system will only be able to pay out 79% of scheduled retirement benefits, according to a report from the trustees of the Social Security and Medicare trust funds. This looming deficit might increase pressure on lawmakers to find a solution.
This year’s bill, named the You Earned It, You Keep It Act and introduced by Representative Angie Craig, a Democrat from Minnesota, aims to address this issue while providing tax relief to Social Security recipients. The bill has two main provisions:
1. Federal income tax exemption for Social Security benefits.
2.
Bill proposes Social Security tax changes
Social Security payroll tax assessment for individuals with incomes of at least $250,000.
Under the current structure, in 2025, payroll taxes for Social Security will be collected on earnings up to $176,100, with the 12.4% tax split between employers and employees. Those who are self-employed bear the entire tax burden. The proposed plan introduces a “doughnut hole” where income between $176,101 and $249,999 would be exempt from Social Security payroll taxes, while income beyond $250,000 would be subject to these taxes.
The bill’s second provision, which removes federal income tax on benefits, could provide more disposable income to older Americans, while the additional payroll taxes from higher-income individuals would help shore up the Social Security trust fund. Despite the potential benefits, there is skepticism about the bill’s prospects. The House Ways and Means Committee has yet to take action, and the bill is still pending review from the House Committee on Energy and Commerce.
It is unlikely to see significant movement this year. Additionally, it could conflict with President Joe Biden’s pledge not to increase taxes on individuals making under $400,000 annually. Therefore, any new legislation would need to balance these aspects.
Some experts believe a bill like the You Earned It, You Keep It Act has slim chances of passing, particularly in a Republican-controlled House and Senate, as Republicans traditionally oppose tax increases. However, public opinion may sway future discussions; a study conducted by the Program for Public Consultation at the University of Maryland in 2024 found that 87% of Americans, including 86% of Republicans, support requiring payroll taxes on all income over $400,000. As legislative discussions continue, Americans will be watching closely to see how these proposed changes could impact Social Security and their retirement.