Democrats Want Fewer Retirees to Pay Federal Tax on Social Security - Here's How

More retirees could keep a larger share of their Social Security benefits under a Democratic proposal that would raise the income thresholds used to determine when those benefits become taxable.

Rep. John Larson and Sen. Richard Blumenthal introduced the Social Security 2100 Act in July. Among its many changes, the bill would raise the federal taxation thresholds for Social Security benefits to $35,000 for individuals and $50,000 for married couples filing jointly from 2027 through 2036, potentially helping you stretch your retirement dollars further.

How Social Security is taxed today

Social Security benefits are not automatically tax-free. Whether a recipient owes federal income tax depends partly on what the government calls combined income, which generally includes adjusted gross income, tax-exempt interest, and half of Social Security benefits.

Under current rules, single filers can begin owing tax on benefits when combined income exceeds $25,000, while the threshold for married couples filing jointly is $32,000.

For individuals with combined income between $25,000 and $34,000, and couples between $32,000 and $44,000, up to 50% of benefits may be taxable. Above $34,000 for individuals or $44,000 for couples, up to 85% of benefits can be included in taxable income.

Importantly, retirees do not pay an 85% tax rate. It means as much as 85% of their Social Security benefit may be included with their other taxable income and then taxed at the applicable federal income tax rate.

What Democrats want to change

The Social Security 2100 Act would raise the base income amount to $35,000 for individuals and $50,000 for married couples filing jointly, with the new thresholds applying to taxable years beginning after 2026 and before 2037.

The effect is easiest to see with an example. A single retiree with $30,000 of combined income currently sits $5,000 above the $25,000 starting threshold, so some Social Security benefits may be taxable. Under the proposed $35,000 threshold, that retiree would fall below the starting point.

Likewise, a married couple with $40,000 of combined income currently exceeds the $32,000 threshold. Raising it to $50,000 could move that household below the point where benefits begin becoming taxable.

The exact savings would still depend on the amount of Social Security received, other income, deductions, and the household's tax rate. The bill would also not make Social Security universally tax-free, as higher-income recipients could continue to have as much as 85% of their benefits included in taxable income.

Why more retirees are getting caught by the tax

One reason the proposal could affect a growing number of retirees is that the current thresholds have barely moved with the times.

The $25,000 individual and $32,000 joint thresholds date to the 1983 Social Security amendments and were not indexed to inflation or wage growth. As wages, pensions, retirement-account withdrawals, and Social Security benefits have risen, more retirees have crossed those fixed thresholds.

When taxation of Social Security benefits began in 1984, fewer than 10% of beneficiary families paid federal income tax on their benefits. The Congressional Budget Office estimates that 48% of Social Security beneficiaries will pay federal income tax on their benefits in 2026.

As a result, the tax increasingly reaches beyond particularly affluent retirees. Middle-income households whose nominal income has risen over several decades can now find themselves over thresholds established more than 40 years ago.

Larson says benefit cuts are not the answer

The tax provision is only one part of a much broader Democratic attempt to expand benefits while strengthening Social Security's finances.

"Benefit cuts are not the answer—we need to make the wealthy pay their fair share," Larson said when introducing the legislation. "Social Security 2100 will protect Americans' hard-earned benefits from cuts and enhance the program to keep pace with rising costs."

Blumenthal similarly framed the bill around protecting retirement income as living costs rise. "Social Security is a promise that must be kept," he said. "The Trump Administration's threats to Social Security and skyrocketing costs require common sense steps to expand benefits and ensure financial stability."

Beyond raising the benefit-tax thresholds, the legislation would increase benefits, strengthen the minimum benefit, change the measure used for annual cost-of-living adjustments, and generate additional revenue from high earners.

There is a trade-off for Social Security funding

Allowing fewer retirees to pay tax on their benefits would also reduce one source of revenue flowing back into the retirement system.

Federal income taxes collected on Social Security benefits help finance Social Security and Medicare. In 2024, taxation of benefits accounted for about 3.9% of Social Security's total income.

To offset some of that lost revenue and improve the program's finances, the broader Social Security 2100 Act includes other measures. These include requiring additional contributions from high earners and imposing a Social Security tax on certain investment income for taxpayers making more than $400,000.

By replacing some of the lost revenue elsewhere, the proposal differs from simply eliminating taxes on benefits without replacing the money. Democrats' approach effectively shifts more of the financing burden toward higher-income households while reducing taxes for some beneficiaries.

The Social Security 2100 Act is not law yet

The Social Security 2100 Act remains proposed legislation, meaning retirees filing today must continue using the existing $25,000 and $32,000 starting thresholds.

Any new limits would have to pass both chambers of Congress and be signed into law before any of its tax changes could take effect.

The bill also faces a difficult political path because the legislation combines expanded benefits and tax relief for some retirees with higher taxes on upper-income households.

Bottom line

Democrats' Social Security 2100 Act could provide the most relief to middle-income retirees who have been pushed above tax thresholds that have remained unchanged for decades. Raising those thresholds would not make Social Security universally tax-free, but it could leave some beneficiaries with a smaller federal tax bill.

Until Congress acts, however, today's thresholds remain in place. Retirees may therefore want to keep an eye on how pensions, investments, and retirement-account withdrawals affect their combined income, especially seniors living on just Social Security.

You May Also Like

23 Ways To Get Money Without Getting A Second Job

By FinanceBuzz Editors

How To Save Money on Car Insurance: 12 Ways to Lower Rates

By Elyssa Kirkham

10 Things Seniors Born Between 1941-1969 Could Take Advantage Of

By FinanceBuzz Editors

19 Dumbest Things Smart People Waste Money On

By Team FBZ

7 Moves If You Want to Stop Living Paycheck to Paycheck

By FinanceBuzz Editors

7 Clever Ways to Crush Your Debt

By FinanceBuzz Editors

Save Money and Get Huge Discounts on Everyday Purchases

AARP Benefits

• Huge discounts on travel, groceries, prescriptions and more
• Access to financial planning resources and health tools
• Join AARP and get 25% off with automatic renewal

Become a member now!

---

Subscribe Today

Unlock the Best Banking Deals and Bonuses

From high-yield savings accounts to cashback checking and sign-up bonuses, we bring you the best banking offers to grow your money smarter.

or

SEE TOP BANKING OFFERS →

By submitting this form you agree to receive emails from FinanceBuzz and to the privacy policy and terms