A new bill introduced in the U.S. Congress, known as the You Earned It You Keep It Act, proposes to completely eliminate federal income taxes on Social Security retirement benefits. If passed, the legislation would take effect in 2026 and could increase the net income for a majority of retirees.
The proposal, introduced by Rep. Josh Riley, aims to provide financial relief to seniors on fixed incomes by allowing them to keep the full amount of their earned benefits. To fund this change, the bill suggests adjustments to how Social Security payroll taxes are collected from high-income earners.
Key Takeaways
- A new bill, the You Earned It You Keep It Act, aims to end federal taxation of Social Security benefits starting in 2026.
- The change would be funded by requiring individuals earning over $250,000 to pay Social Security payroll taxes on their income.
- Currently, up to 85% of a retiree's Social Security benefits can be subject to federal income tax depending on their total income.
- The proposal would not affect state-level taxes on Social Security benefits, which vary by state.
Understanding the Proposed Legislation
The You Earned It You Keep It Act seeks to make a fundamental change to how retirement income is treated by the federal government. For decades, a portion of Social Security benefits has been subject to federal income tax for individuals whose total income exceeds certain thresholds.
This new proposal would remove that tax entirely. The core idea is that since workers contribute to the Social Security system throughout their careers with post-tax dollars, their benefits should not be taxed again upon retirement.
"Seniors paid into Social Security their entire lives. It doesn’t make any sense to tax them on the benefits they earned," Rep. Josh Riley stated. "This common-sense bill will deliver a tax cut to seniors and strengthen Social Security for future generations."
If enacted, this change would simplify financial planning for many retirees. They would no longer need to calculate how much of their benefit is taxable at the federal level, providing more certainty about their monthly income.
How Social Security Benefits Are Currently Taxed
Under current law, whether your Social Security benefits are taxed depends on your "combined income." This figure includes your adjusted gross income, non-taxable interest, and half of your Social Security benefits.
The Internal Revenue Service (IRS) uses specific income thresholds to determine tax liability:
- Individuals: If your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If it's over $34,000, up to 85% of your benefits may be taxable.
- Married couples filing jointly: If your combined income is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If it's over $44,000, up to 85% of your benefits may be taxable.
These rules often impact middle-class retirees who have other sources of income, such as pensions or withdrawals from retirement accounts like a 401(k) or IRA. For many, this tax reduces the spendable income they rely on for essential expenses.
Background on Social Security Taxation
The taxation of Social Security benefits began in 1983 as part of a package of reforms designed to strengthen the system's finances. Initially, a smaller portion of benefits was taxed for higher-income recipients. The rules were later expanded in 1993, increasing the maximum taxable portion to 85%, where it remains today.
Funding the Tax Cut for Retirees
To ensure the Social Security program remains financially stable, the You Earned It You Keep It Act proposes a significant change to how the system is funded. The revenue lost from eliminating the tax on benefits would be offset by increasing contributions from the nation's highest earners.
Currently, there is a cap on the amount of annual income subject to Social Security payroll taxes. For 2025, this cap is expected to be around $176,000. This means any income an individual earns above this amount is not subject to the 6.2% Social Security tax.
Proposed Payroll Tax Changes
The new bill would require individuals earning more than $250,000 per year to pay Social Security payroll taxes on that income. This would create a new tier of contributions, asking high-income workers to pay more into the system to support the tax cut for retirees.
This funding mechanism is designed to make the overall reform revenue-neutral, meaning it would not increase the federal deficit. The goal is to redistribute the tax burden from retirees, many of whom are on fixed incomes, to current high-wage earners.
Potential Impact and Next Steps
If the bill becomes law, it could provide a meaningful financial boost for millions of American seniors. According to proponents, nearly 90% of Social Security recipients would see an increase in their after-tax income. This additional money could help cover rising costs for healthcare, housing, and everyday goods.
However, it is important to note that the bill only addresses federal taxes. A number of states have their own laws regarding the taxation of Social Security benefits. This legislation would not alter those state-level tax rules.
The Legislative Journey
The You Earned It You Keep It Act is still in the early stages of the legislative process. It must be reviewed by committees, debated, and passed by both the House of Representatives and the Senate before it can be signed into law by the President.
While the proposal has support, it will also face scrutiny. Some critics may raise concerns about the long-term financial projections for the Social Security program and the potential impact of higher taxes on high-income individuals. For now, retirees and taxpayers should monitor the bill's progress through Congress for further updates. If it passes, 2026 could mark a significant shift in U.S. retirement policy.
