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New social security bill could change how retirees pay taxes: All you need to know
A bipartisan proposal aims to exempt certain retroactive Social Security benefits from gross income for federal tax purposes.
A new bipartisan proposal could alter how some retirees are taxed on their Social Security benefits, particularly public sector workers who recently received retroactive payments.
According to Newsweek, the No Tax on Restored Benefits Act seeks to exempt certain retroactive Social Security benefits from being counted as gross income for federal tax purposes. The bill is designed to address unintended tax consequences that followed earlier reforms to the Social Security system.
Why the bill matters
Roughly 70 million Americans rely on Social Security benefits each month, but the proposed change primarily affects retired public sector workers such as teachers, firefighters and police officers.
Many of these retirees had their benefits reduced or eliminated in the past because they did not pay Social Security taxes while working.
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Last year, the Social Security Fairness Act reversed two long-standing provisions, the Windfall Elimination Provision and the Government Pension Offset. This allowed affected retirees to receive restored benefits, including retroactive lump-sum payments.
However, those lump sums pushed some retirees into higher income brackets, resulting in unexpected tax bills.
What the proposal would do
The No Tax on Restored Benefits Act would exclude those retroactive payments from taxable income, preventing retirees from being penalized for what lawmakers describe as a one-time correction.
Democratic Representative Chellie Pingree of Maine, a cosponsor of the bill, told Newsweek the earlier reform was “truly transformative” but was never meant to create new financial burdens. She said the new legislation would protect retirees who were previously below the tax threshold from being “unfairly punished” due to retroactive benefit increases.
The bill has also gained support from groups such as the National Association of Police Organizations, which represents many retirees affected by the issue.
Who benefits
The proposal primarily benefits retired public sector workers, such as teachers, firefighters and police officers, who received retroactive Social Security payments after last year’s reforms.
It is aimed at retirees who were previously below the income threshold for taxing Social Security benefits but were pushed into higher tax brackets due to one-time lump-sum payments, resulting in unexpected federal tax bills.
Concerns and criticism
Not everyone supports the proposal. Kevin Thompson, CEO of 9i Capital Group, told Newsweek the bill risks becoming a political talking point, questioning why restored benefits should be treated differently for tax purposes.
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Financial literacy instructor Alex Beene of the University of Tennessee at Martin cautioned that exempting benefits from taxation could add pressure to an already strained Social Security system. He noted that any reduction in tax revenue tied to benefit payments could have long-term fiscal consequences.
Finance expert Michael Ryan told Newsweek the proposal is largely “damage control” for retirees caught off guard by lump-sum payments issued in early 2025 without adequate tax withholding.
