How a Bill to End Taxes on Social Security Benefits Could Actually Save the Program

A Social Security Administration office in Washington, D.C. (Saul Loeb / AFP / Getty Images)

A new bill aims to eliminate taxes on Social Security benefits, a Trump campaign promise that this summer’s Republican tax and spending law failed to deliver on. The twist is that it comes from Democratic lawmakers.

Sen. Ruben Gallego (D., Ariz.) last week introduced the You Earn It, You Keep It Act, a companion to legislation introduced by Rep. Angie Craig (D., Minn.) in the House of Representatives. “Despite decades of paying into the system, seniors are still forced to pay taxes on their hard-earned benefits – all while the ultra-wealthy barely pay into the system at all,” Gallego said in a statement.

The bill would go further than the One Big Beautiful Bill Act, which provided a temporary tax deduction of $6,000 for qualifying people 65 and older. This extra deduction applies to tax years 2025 through 2028 and can be used both by taxpayers who take the standard deduction and by those who itemize their deductions.

It reduces the amount of income subject to taxes, in effect eliminating the taxes that many seniors would otherwise owe on their Social Security benefits, while still keeping the current tax structure in place. Under current law, single tax filers with income above $25,000 and joint filers with income above $32,000 face income taxes on a portion of their benefits. For the purposes of determining Social Security taxation, the Internal Revenue Service uses what it calls “combined income,” which includes a person’s adjusted gross income, tax-exempt interest income, and one-half of their annual Social Security benefits.

The proposed legislation would get rid of taxation of benefits altogether, a pricey proposition since income taxes paid on benefits flow into the Social Security trust fund alongside payroll tax revenue. To pay for the break, the bill would apply Social Security payroll taxes to wages above $250,000. Under current law, only wages up to $176,100 for 2025 are subject to the 12.4% Social Security payroll tax. Employees and employers pay 6.2% each.

The bill’s infusion of new revenue would extend the life of the combined retirement and disability trust fund by 24 years, according to an analysis done for the House version by the Social Security actuaries. The 2025 Trustees report projects that the combined trust fund will run dry in 2034, forcing a 19% cut to benefits unless Congress acts before then to avert the crisis.

Social Security advocates applauded the proposed legislation. The bill would ensure “that all Social Security benefits will be paid in full and on time for the foreseeable future by requiring the wealthiest to contribute to Social Security at the same rate as the rest of us,” said Nancy Altman, president of Social Security Works.

The You Earn It, You Keep It Act faces an uphill battle in the Republican-controlled Congress, where GOP lawmakers are unlikely to support tax increases on higher earners.

Write to Elizabeth O’Brien at elizabeth.obrien@barrons.com