Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards
ThinkAdvisor
capitol in Washington DC with a Social Security card and money

Regulation and Compliance > Legislation

New Bill Ends Tax on Social Security Benefits, but There's a Catch

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • About 40% of retirees pay income taxes on a portion of their benefits.
  • While this tax is unpopular, the revenue goes back to the trust funds, making up about 4% of Social Security's revenue.
  • The bill would fill the gap through congressional appropriations, which could lead to benefit cuts, Social Security advocates say.

Rep. Jefferson Van Drew, R-N.J., has introduced legislation, The Social Security Tax Freedom Act, that would remove the requirement for Social Security benefits to be included in taxable income.

Under the bill, H.R. 9359, the missing tax revenue would be made up through congressional appropriations, a change that Social Security advocates warn would change the very nature of the program and put benefits at risk for future cuts.

“People who rely on Social Security have already more than contributed their fair share through years of payroll taxes and hard work,” Van Drew said in a statement. “They have busted their backs for decades, and now, when it is time for them to enjoy the benefits, they see portions of their hard-earned benefits reduced by even more taxes. It is just outrageous.”

The bill ”would violate the earned right nature” of the Social Security program by dipping into general government funding, Dan Adcock, director of government relations and policy for the National Association to Preserve Social Security and Medicare, told ThinkAdvisor in an email.

“We favor Rep. John Larson’s Social Security 2100 Act and similar bills in the House and Senate that expand and strengthen the program by demanding that the wealthy begin contributing their fair share.”

The rationale behind the taxation of benefits “is to treat them the same way that private employer-sponsored retirement plan benefits are taxed, with the one difference that the proceeds are dedicated to Social Security,” added Nancy Condon, president of Social Security Works, in another email. “Notwithstanding the rationale, the taxation is extremely unpopular.”

The Social Security 2100 Act “addresses the unpopular provision, and has done so since it was first introduced, about a decade ago,” Condon continued. ”The big difference is that, unlike the Social Security Tax Freedom Act, the Democratic proposal replaces the lost revenue by requiring that those with incomes over $400,000 pay their fair share.”

The revenue from the taxation of benefits accounts for about 4% of Social Security’s revenue, Condon said.

As the Social Security Administration explains, about 40% of people who get Social Security must pay federal income taxes on up to 85% of their benefits.

“Since Social Security is currently facing a revenue shortfall in about a decade, the Social Security Tax Freedom Act is a cruel mirage,” Condon continued. “Benefits will no longer be taxed but the benefits themselves will be cut by more than the tax savings — and that cut will occur sooner than if Congress took no action whatsoever. If Congress decides to address the taxation of benefits, the only responsible action is to replace the foregone revenue, as the Larson bill does.”

Van Drew stated that his bill “ensures that the Social Security Trust Funds and related funds, like the Railroad Retirement Fund, will not lose any money due to the tax repeal.”

The Treasury “will cover any shortfall to maintain the financial stability of these funds,” Van Drew said.


NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.