If you have just begun retirement planning, you might be surprised to find that Social Security payments are taxed, a fact that has drawn criticism and a number of proposed fixes.
About 70 million people receive Social Security payments every month. About 40 percent of those beneficiaries pay taxes on their benefits.
The IRS formula for taxing benefits means (roughly) that if your income exceeds $25,000 (filing individually) or $32,000 (filing jointly), you have to pay federal taxes on some portion of your benefits. Generally, if Social Security is the only source of income, it probably will not be taxable, although 12 states collect their own taxes Social Security. About 40 percent of beneficiaries pay federal taxes on benefits.
One of the latest bills to address this issue was proposed in January 2024 with the "You Earned It, You Keep It Act," introduced by Rep. Angie Craig (D-MN). This bill would eliminate federal taxes on benefits, which would increase income for some retirees, but would apply Social Security tax to more of the income earned by higher income working individuals, according to Money.com.
At least one analysis projects that the bill would keep Social Security solvent through 2054, decades longer than the projected collapse in 2031. However, as with other bills proposed by members of either party, passage of the bill is uncertain or downright unlikely, according to US News.