Social Security Tax Cut: New Proposal Could Save Seniors Big Money by 2025
Retirees who think they’ll leave income taxes behind once they start collecting Social Security benefits might be in for a rude surprise. Certain Social Security recipients must pay federal income taxes on their benefits, depending on how much outside income they earn. U.S. Sen. Pete Ricketts (R-Neb.) wants to change that by eliminating federal income taxes on all Social Security benefits.
In September, Ricketts introduced the Social Security Check Tax Cut Act, a bill that aims to begin a total phaseout of federal taxes on benefits. The bill was modeled after a successful earlier effort to eliminate state taxes on Social Security benefits initiated when Ricketts was Nebraska’s governor.
“All Social Security benefits should be completely tax-free. My bill helps us get there in a fiscally responsible way,” Ricketts said in a Sept. 14 news release.
A few days later, Ricketts told a group of seniors, state senators and other stakeholders that his bill would cut the federal tax on Social Security benefits by 20% over two years
“This would allow a typical senior to save $800 in 2025,” he said. “That’s 187 gallons of milk or 208 gallons of gas at current prices — real relief in this time of rising costs and stubborn inflation. It would mean government stops taking money you earned, and are entitled to, out of your pocket. It brings the same policy we implemented in Nebraska when I was Governor to all Americans by eliminating the double tax on Social Security benefits.”
As Nebraska governor, Ricketts signed a law to begin eliminating state taxes on Social Security benefits over a period of years. The federal Social Security Check Tax Cut Act would similarly phase out federal taxes on Social Security benefits, beginning with a 10% cut in year one and increasing to 20% in year two. Under his plan, Congress could continue phasing out the tax by 10% a year and make all Social Security income tax free by 2033.
As it stands now, recipients must pay taxes on benefits if they have “substantial” outside income from sources such as wages, self-employment, interest, dividends and other taxable income, according to the Social Security Administration.
Individuals with provisionary income above $25,000 and joint filers above $32,000 must pay taxes on up to 50% of their Social Security benefits. For individuals with provisionary income above $34,000 and joint filers above $44,000, up to 85% of Social Security is taxed.
As previously reported by GOBankingRates, although Social Security benefits are adjusted for inflation every year through cost-of-living adjustments (COLAs), the income tax thresholds have not changed since benefits were first taxed in 1984. This means that whenever benefits are increased, more seniors are exposed to income taxes on Social Security.
“By passing this bill, we can take the first step in boosting the retirement income of millions of seniors in Nebraska and across the country,” Ricketts said.
As governor of Nebraska, Ricketts had bipartisan support for his bill to phase out state income taxes on Social Security. But that might be a tough sell in Washington, D.C., given the partisan divide in the nation’s capital.
For his bill to make it into law, Ricketts would need to have it approved in the Democrat-controlled Senate and have it signed by President Joe Biden, another Democrat. It would also need to pass the Republican-controlled U.S. House — also no sure thing, given the intraparty infighting that has plagued the GOP in recent weeks.
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