Farewell to the Social Security Payroll Tax — The Bill That Could Change Everything

By Oliver

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Farewell to the Social Security Payroll Tax — The Bill That Could Change Everything

There are initiatives in place to simplify the retirement payment process, which could significantly alter the Social Security payroll tax. A law proposed last week would exempt social security benefits from the state income tax. Bill drafters claim that only nine states, including Vermont, provide tax breaks.

According to the legislation, the Social Security income tax will be phased out over eight years. If approved, the tax would begin the following year and expire in 2034. Only individuals earning less than $50,000 and couples earning less than $65,000 are exempt from paying taxes under the current system.

The bill that could change the Social Security payroll tax

Some older Americans are surprised to learn that a portion of their Social Security income is taxed each year when tax time arrives. Some beneficiaries may owe the IRS money in April because the government does not deduct taxes from their benefits right away.

Meanwhile, the Old-Age and Survivors Insurance Trust Fund, which pays retirement benefits, is expected to run out of money in 2033, and Social Security trust funds are gradually drying up.

The trustees of the Social Security and Medicare trust funds recently released a report stating that after that date, the Social Security system will only be able to pay out 79% of retirement benefits due. Legislators may feel more pressure to find a solution if a Social Security deficit is imminent.

This year’s bill aims to preserve the trust fund balance while providing a tax break to Social Security recipients. Representative Angie Craig, a Democrat from Minnesota, introduced the You Earned It, Keep It Act in January. The bill includes two primary provisions:

  • Federal income tax exemption for Social Security benefits
  • Social Security payroll tax assessment for those with incomes of at least $250,000.

In 2025, payroll taxes for Social Security will be collected on earnings of up to $176,100. We split the 12.4% tax between employers and employees. Employees who work for themselves are responsible for the entire cost.

In its current form, the plan would exempt a doughnut hole of income from Social Security payroll taxes, according to Bill Smith, national director of tax technical services for CBIZ MHM, a financial firm based in Reston.

The proposal, for example, would require high-income workers to pay Social Security payroll taxes on the first $176,100 of their income, not pay Social Security taxes on earnings between $176,101 and $249,999, and then pay taxes on earnings above $250,000.

While the bill’s second component, which eliminates the federal income tax on benefits, may put money back in the hands of older Americans, the additional payroll taxes would benefit the Social Security trust fund.

Farewell to the Social Security Payroll Tax — The Bill That Could Change Everything
Source (Google.com)

Some are skeptical about the new Social Security payroll tax bill

The House Ways and Means Committee has yet to act on the You Earned It, You Keep It Act. Additionally, it has been forwarded to the House Committee on Energy and Commerce for review; however, no action is expected this year.

Additionally, it would violate President Joe Biden’s promise to keep taxes on those earning less than $400,000 unchanged. In its current form, it would raise Social Security payroll taxes for those earning more than $250,000.

Bills that do not pass must be reintroduced for further consideration after the new year. A law similar to the You Earned It, You Keep It Act is unlikely to pass in a Republican-controlled House and Senate, despite President-elect Donald Trump‘s stated support for eliminating Social Security taxes.

Historically, Republican legislators have opposed tax increases. Republican voters, on the other hand, are less opposed to the idea. In 2024, the University of Maryland’s Program for Public Consultation found that 87% of American citizens, including 86% of Republicans, support requiring payroll taxes on all income above $400,000.

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