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New financing

The big change in the bill with how benefits are financed has to with the Social Security payroll tax. Employers and employees each pay tax on 6.2% of wages up to a maximum of $168,600 in 2024 — the self-employed pay 12.4% in taxes. The proposed bill would kick the payroll tax back into gear once earnings exceed $250,000, leaning on high earners to increase funding.

These financing measures might allow retirees to afford enjoying their full Social Security benefits. At present, folks with a combined income — which includes your adjusted gross income, plus nontaxable interest, plus half of your Social Security benefits — of $25,000 or more (and couples filing jointly with a combined income of $32,000 or more) currently pay taxes on at least 50% of their benefits. The bill would eliminate these taxes.

According to the SSA, about 40% of people who receive Social Security benefits end up paying taxes on them each year.

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Inflation is 'eroding' benefits

The Social Security Old-Age and Survivors Insurance Trust Fund is currently projected to run low by 2033, which means retirees are expected to receive about 77% of their benefits at that time. If the bill is passed, and the SSA analysis is correct, benefits would be fully funded until 2054.

Many depend on these benefits, but despite a 3.2% cost-of-living adjustment to Social Security payments this year, some beneficiaries aren’t convinced the monthly checks will be enough to account for the increased cost of basic goods, which are up 3.1% compared to a year ago, according to the latest Census Bureau numbers.

For these folks, a tax break on benefits may go a long way. A retired elementary school teacher, Sally Hokkanen, told Fox 9 Minneapolis-St. Paul that she and her husband rely on Social Security payments and their 401(k)s to make ends meet.

“Most of it goes to rent and transportation,” Hokkanen said, adding that she’d love to use the extra money to travel if the tax on Social Security benefits gets eliminated with the “You Earned It, You Keep It Act.”

"Historic inflation is eroding seniors' budgets, jeopardizing the financial security they've worked their whole lives to achieve," Rep. Yadira Caraveo, D-Colo., who co-sponsored the bill, said in a news release. "The last thing they need is for the government to double tax their hard-earned Social Security benefits."

The reintroduced bill was originally announced in August 2022.

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Serah Louis is a reporter with Moneywise.com. She enjoys tackling topical personal finance issues for young people and women and covering the latest in financial news.

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