Taxes on Social Security have become a hot-button issue. President Trump pledged to eliminate them during the election, and while that hasn't happened, the "big, beautiful bill" introduced a new senior deduction worth as much as $6,000 for single filers and up to $12,000 for married joint filers.
However, some retirees on Social Security face a much bigger potential tax burden than others, and lawmakers are trying to change that with the passage of new legislation. The new proposed law would shield qualifying retirees from a potentially huge tax bill owed in 2026 for the 2025 tax year.
Here's what the law would do, along with some details about why seniors may need to take advantage of its protections.
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Bipartisan legislation would shield seniors from a huge tax bill for 2025
With filing season in full swing, some Social Security retirees risk a very unpleasant tax surprise this year, thanks to the Social Security Fairness Act.
This Act was enacted in 2025 and repealed two existing laws that had long limited the Social Security benefits collected by public service workers whose jobs weren't covered by Social Security taxes. The laws that were eliminated include the Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). Their elimination was made retroactive to Jan. 1, 2024.
The change to these laws resulted in the Social Security Administration recalculating benefits and issuing lump-sum back payments starting in the 2025 tax year. While this extra money can significantly increase the financial security enjoyed by affected seniors and potentially reduce the amount of withdrawals from retirement plans, it also means that retirees have a tax problem because current laws require that retroactive payments be taxable in the year the money is received.
While retirees would normally have collected the extra benefits over many years, the large lump sum payment of retroactive benefits will mean including a huge payment on their 2025 federal income tax return. This can mean affected retirees are pushed into a higher tax bracket and will likely see an increase in the portion of their Social Security tax subject to federal tax. Since Medicare premiums may also increase when income climbs above a certain threshold, this could also lead to higher premiums later.
The No Tax on Restored Benefits Act is a bipartisan bill that creates a gross income tax exclusion for the retroactive payments that some public sector beneficiaries received because of the Fairness Act. If it passes, this act could address these issues and potentially save impacted seniors many thousands of dollars.
Will retirees end up getting their tax break?
It's unclear if this legislation will pass, although it has bipartisan support.
Until it does, taxpayers who received extra money will need to follow the current IRS rules and report their retroactive payments when they file their 2025 taxes. The U.S. House Ways and Means Committee is considering the change to the law, and retirees who are impacted should monitor carefully so they'll know what their obligations are to the IRS.
