Congress rethinks taxable Social Security benefits while proposing tax increase

In a significant legislative initiative, Senator Ruben Gallego (D-AZ) has introduced the You Earned It, You Keep It Act in the Senate. The bill aims to fundamentally reform the taxation of Social Security benefits and strengthen the program’s financial future.

Lawmakers aim to make Social Security benefits tax-free without cutting program revenue

Under current law, up to 85% of Social Security benefits may be taxed, depending on a retiree’s total income. Gallego’s proposal would repeal the requirement to include Social Security benefits in taxable income altogether, meaning beneficiaries would no longer face federal income tax on these benefits.

To prevent revenue losses and maintain the program’s integrity, the bill stipulates that the U.S. Treasury will make annual transfers to the Social Security trust funds and Medicare’s hospital insurance trust fund, equal to the amounts that would have been collected through benefit taxation. This means that the funds will continue to receive the necessary financial support, ensuring the stability and sustainability of these vital programs.

High earners would pay more into Social Security under expanded payroll tax proposal

Instead of increasing income tax rates, the proposal expands the Social Security payroll tax to wages exceeding $250,000 annually. Currently, earnings above approximately $176,100 are exempt from Social Security payroll taxes. Under the new plan, wages between $176,100 and $250,000 would remain untaxed (this structure is sometimes called a “donut hole” in the payroll tax base), with the payroll tax resuming above $250,000. This would strengthen the system and promote equity, ensuring higher earners contribute proportionally.

Proposal promises permanent tax relief for seniors and stronger Social Security through 2058

According to Gallego’s office and corroborated by analysis from the Social Security Administration and allies, this two-part approach would restore full taxation relief for seniors, providing immediate financial relief. It would also extend the solvency of the Social Security trust fund to 2058 (or up to 2054, as estimated in similar legislative proposals). This represents a dual achievement: immediate financial relief for retirees and long-term stability for the nation’s bedrock retirement program.

Gallego emphasized the fairness of the bill, stating:

“Trump claimed he ended taxes on Social Security. My bill actually does it. Permanently.”

Advocacy groups such as the Senior Citizens League and Social Security Works have applauded the move. They highlighted its dual impact, helping seniors keep more of their earned benefits while making the system more equitable and solvent.

Quick summary of the You Earned It, You Keep It Act

• Direct relief for retirees: Seniors would no longer pay federal income tax on Social Security benefits, boosting disposable income.
• Equitable funding: Higher earners would cover the Social Security trust fund shortfall, while working- and middle-class taxpayers keep current rates.
• Long-term viability: The plan extends Social Security’s solvency for decades, protecting benefits for current and future retirees.