You Earned It, You Keep It Act

Bill Number: S. 2716
Origin Chamber: Senate
Congress: 119th Congress, Session 1
Policy Area: Taxation
Status: Introduced
Latest Action: 2025-09-04: Read twice and referred to the Committee on Finance.
Last Updated: 2025-12-05T06:19:40Z

AI-Generated Summary

Purpose of the Legislation

The "You Earned It, You Keep It Act" (S. 2716) aims to make Social Security benefits tax-free for recipients while reforming the program's funding and benefit calculations. It seeks to increase contributions from higher earners (up to $250,000 annually) to support the Social Security system, protect trust funds from revenue losses, and provide a modest benefit increase tied to high earnings, without affecting eligibility for other low-income programs.

Key Provisions

Repeal of Taxation on Social Security Benefits (Section 2):
Eliminates the inclusion of Social Security benefits in taxable gross income starting in the year after enactment.
Appropriates funds from the U.S. Treasury to Social Security trust funds (including those for retirement, disability, hospital insurance, and railroad retirement) to offset lost tax revenue from this change.

Expansion of Taxable Wages and Self-Employment Income (Section 3):
Removes the current annual cap on wages subject to Social Security payroll taxes (currently around $168,000, adjusted yearly) for earnings up to $250,000 starting in 2026.
Wages and self-employment income above the current cap but below $250,000 become taxable for Social Security purposes if the cap is less than $250,000.
Earnings over $250,000 remain exempt from these taxes.
Includes special rules for workers with multiple employers to ensure taxes are collected on total earnings up to $250,000, with potential refunds or additional payments as needed.
Adjusts the "national average wage index" (a measure used to calculate benefits and caps) by adding fixed annual increases (0.7% to 0.9% from 2026 onward) to account for broader income inclusion.
Applies to railroad retirement taxes similarly.

Inclusion of High Earnings in Benefit Calculations (Section 4):
Adds a new factor to the primary insurance amount (the base for monthly Social Security benefits): 2% of an individual's "excess average indexed monthly earnings" (earnings above $250,000 or the annual cap, whichever is higher, after 2025).
Defines "excess" earnings as wages or self-employment income beyond these thresholds, indexed for inflation.
Updates related formulas for family benefits and other calculations to incorporate this excess.
Ensures no impact on eligibility or benefit amounts for Supplemental Security Income (SSI), Medicaid, or Children's Health Insurance Program (CHIP) by treating benefits as if the law had not changed.

Significant Changes to Existing Law

Taxation of Benefits: Currently, up to 85% of Social Security benefits can be taxed as income for higher-income recipients (under Internal Revenue Code Section 86). This bill fully repeals that, shifting the burden to Treasury appropriations rather than recipient taxes.
Payroll Tax Caps: Replaces the existing fixed cap on taxable wages (under Sections 3121 and 1402 of the Internal Revenue Code) with a higher $250,000 threshold, effectively taxing more middle- and upper-middle-income earnings while exempting the very highest.
Benefit Formula: Modifies the Social Security Act (Section 215) to include a small credit for earnings over $250,000 in benefit computations, which previously ignored all income above the cap. This is the first time excess high earnings directly influence benefits.
Trust Fund Protections: Introduces direct appropriations to maintain fund solvency, unlike current law where benefit taxation indirectly supports the funds.
Effective dates: Benefit tax repeal applies immediately after enactment; wage/self-employment changes and benefit formula updates start in 2026.

Potential Impacts

On Citizens: Retirees and disabled individuals receiving Social Security benefits will no longer pay federal income tax on them, increasing their after-tax income (potentially by thousands annually for middle-income recipients). Higher earners (up to $250,000) will pay more in payroll taxes (6.2% employee + 6.2% employer portions), but may see slightly higher future benefits. Low-income program recipients (SSI, Medicaid, CHIP) are unaffected.
On Government Agencies: The Social Security Administration will recalculate benefits for new retirees using expanded earnings data, increasing administrative workload. The IRS must update withholding, reporting, and refund processes for payroll taxes and handle new rules for multiple employers. The Treasury Department will manage annual appropriations to trust funds, potentially costing billions but offset by higher payroll tax collections.
On International Relations: Minimal direct impact, though U.S. citizens working abroad (under certain agreements) may see changes in how foreign earnings count toward the $250,000 threshold.

Main Stakeholders Affected

Social Security Recipients: Primarily older adults, disabled workers, and survivors who benefit from tax-free payments and potential modest benefit increases.
Workers and Self-Employed Individuals: Middle- to upper-income earners (especially those earning $168,000–$250,000) face higher payroll taxes; very high earners (over $250,000) see no tax change but possible benefit gains.
Employers: Must adjust payroll withholding for employees nearing or exceeding the new threshold, including tracking multiple jobs.
Government Entities: Social Security Administration (benefit adjustments), IRS (tax collection/enforcement), Treasury (appropriations), and trust funds (solvency maintenance).
Low-Income Program Participants: SSI, Medicaid, and CHIP users, protected from benefit changes.

Notable Legal, Constitutional, or Political Implications

Legal: Amends core sections of the Internal Revenue Code (1986) and Social Security Act (1935), requiring coordination between tax and entitlement laws. Introduces new refund mechanisms and employer tracking rules, which could lead to litigation over multi-employer calculations or "related person" definitions (e.g., family-owned businesses). The harmless provision for low-income programs reinforces anti-poverty safeguards under existing welfare statutes.
Constitutional: No direct challenges anticipated, as it involves congressional taxing and spending powers (Article I, Section 8). However, the fixed $250,000 threshold (not inflation-adjusted) might raise equal protection concerns if it disproportionately affects certain groups over time.
Political: Addresses long-standing debates on Social Security fairness by eliminating a regressive benefit tax while expanding the taxable base to progress the system slightly (taxing more from the top 10–15% of earners). Could extend program solvency by 5–10 years via added revenues (estimates vary), but appropriations may spark deficit concerns. As a Senate-introduced bill (by Sen. Gallego, referred to Finance Committee), it reflects Democratic priorities on income inequality, potentially facing opposition over costs and high-earner benefits.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Sen. Gallego, Ruben [D-AZ]

Recent Actions

2025-09-04: Read twice and referred to the Committee on Finance.
2025-09-04: Introduced in Senate

Bill Versions

You Earned It, You Keep It Act — issued 2025-09-04 — PDF (18 pages)