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For many retirees, Uncle Sam gives with one hand and takes away with the other. But that could soon change.
A bill introduced in the U.S. House of Representatives would exclude Social Security benefits from being classified as federally taxable income starting in 2023. Currently, about half of people receiving Social Security pay taxes on their benefits — if this passes, they would no longer do so.
The bill — called the “You Earned It, You Keep It Act” — was introduced by Rep. Angie Craig (D-Minn.). Here’s what you need to know about how Social Security works now, what the bill would do and where the bill stands.
How Social Security benefits are taxed now
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Social Security benefits may be considered taxable income, despite the fact Social Security represents income you were already taxed on during your working years. Half of your Social Security benefit is included in what the government calls your “combined income,” and that income is used to determine how much of your benefit is subject to federal tax.
If you file federal taxes as an individual and earn a combined income of:
- between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
- more than $34,000, up to 85% of your benefits may be taxable.
If you file federal taxes jointly and earn a combined income of:
- between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.
- more than $44,000, up to 85% of your benefits may be taxable.
Generally, income tax brackets are adjusted for inflation each year. However, Social Security hasn’t received the same courtesy for as long as it has been considered taxable income — nearly 40 years. The thresholds above have been changed since they were enacted in 1983.
As a result, the number of retirees paying taxes on Social Security has ballooned over time. What affected less than 10% of recipients in 1984 now affects about half.
The Social Security Administration says benefit taxation “usually only happens if you have other substantial income in addition to your benefits” such as wages from work or investment income. But their definition of “substantial” might differ from yours — it often doesn’t take much income from any other source to trigger taxes.
States can also separately tax benefits, although many do not. Check out our story, “26 States That Don’t Tax Social Security Benefits.”
What the bill would change
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If passed into law, the “You Earned It, …….