New Social Security Tax Bill Could Save Retirees Money—but There’s a Catch

A new bill aiming to modify Social Security payroll taxes and adjust tax exemptions on benefits has been introduced in Congress. If passed, the legislation would create exemptions for certain Social Security recipients while imposing additional payroll taxes on high earners. The proposal comes amid concerns over the long-term solvency of the Social Security trust fund, which is projected to deplete by 2033.

Social Security Tax Structure Under Review

Under current regulations, Social Security benefits are subject to federal income tax for recipients exceeding specific income thresholds. Additionally, payroll taxes are levied on earnings up to $176,100 in 2025, with employees and employers each contributing 6.2%. Self-employed individuals are responsible for the full 12.4% tax.

The You Earned It, You Keep It Act, introduced by Representative Angie Craig (D-MN), seeks to revise these policies in two key ways:

• Exempting Social Security benefits from federal income tax
• Applying payroll taxes to earnings above $250,000 while keeping the existing cap at $176,100, creating a gap where income between $176,101 and $249,999 would remain untaxed for Social Security purposes.

Potential Impact on Retirees and High Earners

If enacted, the bill would eliminate federal income tax on Social Security benefits, potentially increasing disposable income for retirees. However, to compensate for the loss of tax revenue, it would require individuals earning over $250,000 annually to resume paying Social Security payroll taxes after surpassing the current tax cap.

Proponents argue that this strategy could help sustain the Old-Age and Survivors Insurance Trust Fund, ensuring continued retirement benefits beyond 2033. Without intervention, Social Security is projected to pay only 79% of scheduled benefits after that point.

Legislative Outlook and Political Considerations

The bill has been referred to the House Ways and Means Committee and the House Committee on Energy and Commerce for review, but it faces significant hurdles. Given the current composition of Congress, passage appears unlikely this year.

Additionally, the proposed tax changes could conflict with President Joe Biden’s pledge not to raise taxes on Americans earning less than $400,000 annually. While the bill targets higher-income earners, it may still be viewed as an indirect violation of that commitment.

A 2024 study by the Program for Public Consultation at the University of Maryland found that 87% of Americans—including 86% of Republicans—support applying payroll taxes on earnings above $400,000. However, broader tax increases have historically faced resistance from Republican lawmakers, making the bill’s chances of advancement uncertain.