Social Security benefits have been subject to federal income taxes for nearly 40 years, but that could soon change if a new bill makes its way through Congress. The Senior Citizens Tax Elimination Act proposes to completely eliminate taxes on Social Security benefits, potentially saving millions of retirees thousands of dollars annually.
This revolutionary bill has steadily gained support, with 25 co-sponsors already signed on. But how likely is it to actually pass? And why were Social Security benefits ever taxed in the first place? To understand this legislation's impact, it's essential to understand the history and current taxation of Social Security benefits.
A Brief History: Taxation of Social Security Benefits
Until 1984, Social Security benefits were entirely exempt from federal income taxes. This changed with the 1983 amendments to the Social Security Act, which allowed up to 50% of benefits to be taxed for individuals whose provisional income exceeded certain thresholds. Provisional income includes adjusted gross income, non-taxable interest, and 50% of Social Security benefits.
The Tax Reform Act of 1986 went even further. Up to 85% of benefits could be taxed for provisional incomes exceeding higher thresholds. This seismic shift dramatically increased taxes on seniors, many of whom rely on Social Security as their primary or only source of retirement income.
Under the current system, here's how much of your benefits may be taxed based on your provisional income:
· 0% taxed: Married filing jointly, provisional income under $32,000; Single, provisional income under $25,000
· Up to 50% taxed: Married filing jointly, provisional income $32,000-$44,000; Single, $25,000-$34,000
· Up to 85% taxed: Married filing jointly, over $44,000; Single, over $34,000
For reference, the average Social Security benefit in 2022 is $1,657 per month or $19,884 per year. With the average retirement income around $40,000, many retirees fall into the 50-85% brackets.
The Push for Change: The Senior Citizens Tax Elimination Act
With so many seniors impacted by Social Security benefit taxes, there has been a strong push in recent years to repeal this taxation entirely. The Senior Citizens Tax Elimination Act represents the latest attempt.
First introduced in 2021 by Senator Mike Enzi (R-WY), the bill currently has 25 bipartisan co-sponsors. It would amend the Internal Revenue Code to exclude Social Security benefits from gross income. This effectively eliminates all federal income taxes on these benefits.
For a deeper review of the information, I have included a link to the Medicare Channel discussing this: https://www.youtube.com/watch?v=-Z7rCvjnCFQ
Maybe time to write or call your Congress person. https://www.house.gov/representatives
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