Social Security benefits would be free from federal income tax

Social Security benefits would be exempt from federal income tax. The exemption would cover benefits taxed under the federal income-tax rule for Social Security benefits. Treasury money would replace lost transfers to affected Social Security, Medicare hospital insurance, and railroad retirement funds. The exemption would apply to tax years beginning after the date the bill becomes law.

Workers and employers would pay Social Security payroll taxes on covered wages above $250,000. Similar rules would apply to the Social Security portion of railroad retirement payroll taxes. While the annual Social Security earnings cap is below $250,000, wages between that cap and $250,000 would be exempt. Once that cap reaches $250,000, all covered wages would face the tax. These wage and railroad payroll-tax rules would apply to pay received in calendar years after 2025.

Self-employed people and workers with several employers would calculate Social Security taxes using their combined earnings. The self-employment calculation would cover earnings below the annual Social Security cap and combined earnings above $250,000. For self-employment taxes, wages would reduce the earnings taxed below the annual cap and count toward the $250,000 threshold. Workers with several employers would owe any employee tax shortfall calculated by treating their wages as coming from one employer. The self-employment rules would apply to tax years beginning after December 31, 2025. The multiple-employer rule would apply to wages received after 2025.

Social Security would count certain high earnings toward monthly benefits. This would cover workers first eligible for retirement or disability benefits after 2025, or who die after 2025 before becoming eligible. Only earnings above the higher of $250,000 or the annual Social Security earnings cap would qualify. The monthly benefit formula would include 2 percent of these earnings averaged over time and adjusted for changes in wages. The formula would count wages paid and self-employment income credited for years after 2025.

Agencies would disregard Social Security benefit increases caused by the bill when checking certain income-based benefits. The protection would cover Supplemental Security Income payments and eligibility, Medicaid eligibility, and Children’s Health Insurance Program eligibility. Agencies would count no more Social Security income than the person would receive under the rules in effect the day before enactment.