Short answer: That’s exactly what the bill aims to do—eliminate federal income tax on Social Security benefits—and then fund Social Security by applying payroll tax again above $250,000 of wages (a “donut hole,” so high earners contribute more). A House companion bill (H.R. 2909) mirrors the core idea.
Summary
What the bill does: Repeals the income-taxation of Social Security benefits (Internal Revenue Code §86).
How it pays for it: Restarts Social Security payroll tax above $250,000 of earnings and makes General Fund transfers so trust funds aren’t shortchanged.
Solvency impact: SSA’s actuaries estimate 24 more years of full, on-time payments (to ~2058).
Status: Introduced in both chambers in 2025; not yet law.
Cross-border note (Canada): Treaty rules already tax Social Security only in your country of residence; in Canada, just 85% of U.S. Social Security is included in income (15% deduction). The bill wouldn’t automatically change that; watch for any treaty or guidance updates.
What’s in the “You Earned It, You Keep It” Act?
1) Ends federal taxes on Social Security benefits
The bill repeals §86 so 0% of your Social Security would be included in federal taxable income going forward. (Today, up to 85% can be taxable based on income thresholds that haven’t changed since the 1980s.)
2) Protects the trust funds
Because current benefit taxes help fund Social Security and Medicare, the bill directs General Fund transfers to replace that lost revenue.
3) Adds a high-earner payroll tax “donut hole”
Wages are taxed for Social Security up to the annual cap (e.g., $176,200 in 2025). Under the bill, payroll tax resumes on wages above $250,000; once the cap rises past $250,000 in the future, all wages will be covered. Self-employment is coordinated similarly.
4) Timeline & process
H.R. 2909 (House) and the Senate text are introduced and in committee. Implementation dates would follow enactment—this is not in effect for 2025.
Current Law vs. Proposed Law (Quick Comparison)
| Topic | Current Law (2025) | Proposed by the Act |
| Portion of Social Security that can be taxed | Up to 50%/85% based on income thresholds ($25k/$32k & $34k/$44k) | 0% (repeal of §86) |
| Trust-fund revenue from benefit taxes | Yes | Replaced by General Fund transfers |
| Payroll tax on wages above the cap | No (stops at cap) | Yes, resumes above $250,000 |
| Estimated solvency impact | Depletion projected in the 2030s | Extends full benefits ~24 years (to ~2058) |
Planning Implications if It Passes
- Lower AGI for many retirees. If Social Security is excluded from taxable income, Adjusted Gross Income (AGI) may drop—potentially affecting IRMAA brackets (Medicare surcharges), Net Investment Income Tax exposure, and phase-outs tied to AGI. Await SSA/IRS implementation details before modeling.
- Roth conversion windows. With lower AGI, some retirees may gain more room for Roth conversions at lower marginal rates.
- State taxes. This is federal only. A handful of states still tax benefits; those rules wouldn’t change unless states act.
Cross-Border Spotlight: U.S. Social Security, CPP & OAS When You Live in Canada
- Where are benefits taxed? Under the Canada–U.S. tax treaty, Social Security/CPP/OAS are taxable only in your country of residence (i.e., Canada if you reside there; the U.S. if you reside in the U.S.).
- How much of U.S. Social Security is taxed in Canada? Canada includes 85% of U.S. Social Security in income (a 15% deduction under treaty rules, claimed on CRA line 25600).
- Would Gallego’s bill change that? Not automatically. Treaty provisions govern cross-border taxation. We’ll need to watch final legislation, CRA guidance, and any changes to the Canada–U.S. Tax Treaty or the Social Security Totalization Agreement before assuming a different result for Canadian residents.
- Takeaway for movers to Canada: Even if the U.S. makes benefits tax-free domestically, Canadian residents could still see their Social Security taxed in Canada (with the 15% treaty deduction) unless treaty rules or guidance change.
FAQs
Will my 2025 return treat Social Security as tax-free?
No. The bill is introduced, not enacted. For 2025, the usual IRS rules apply (up to 50%/85% taxable depending on income).
How is this different from the “One Big Beautiful Bill” senior deduction?
That law added a temporary extra deduction for seniors; it did not make Social Security tax-free. Gallego’s bill would eliminate taxation of benefits entirely.
Who would pay more under this plan?
Workers with wages above $250,000 (and their employers) would pay additional OASDI payroll tax on income over that threshold.
Does this affect Medicare’s finances?
The bill includes hold-harmless transfers for the Medicare Hospital Insurance trust fund because some current benefit-tax revenue flows there.
I live in Canada. Do I still pay tax on U.S. Social Security?
Yes, in Canada, generally on 85% of the benefit (15% treaty deduction), unless guidance or the treaty changes in the future.
This article is general information, not tax or legal advice. For a tailored plan, especially if you split time between the U.S. and Canada, reach out and we’ll map your Social Security, CPP, and OAS strategy under current law and under the bill’s potential rules.
What To Watch Next
- Committee movement in the House and Senate; markups or amendments. Congress.gov
- SSA/IRS technical guidance on how excluding benefits from AGI could affect IRMAA, tax credits, and phase-outs.
- Treaty guidance from CRA/Finance Canada and IRS/Treasury for residents of Canada, including any updates to the Tax Treaty or Totalization Agreement. Canada.ca
Sources
- Sen. Ruben Gallego press & bill PDF (Senate): overview and full text. Senator Ruben Gallego
- H.R. 2909 (House): Congress.gov bill page & text. Congress.gov
- IRS Publication 915 (2025 filing season): current taxation rules for benefits. IRS
- News analyses of solvency & contrasts with OBBB: Barron’s; Kiplinger
- Cross-border taxation: CRA line 25600 (15% deduction for U.S. Social Security); Tax-treaty background (Art. XVIII); SSA Totalization overview. Canada.ca; The Tax Adviser
