Millions Face a Tax Shock on Social Security Back Pay. Congress Is Racing to Fix It

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Retirement Social Security Share Share Close Mail Page URL https://money.com/social-security-tax-hit/ Link copied! Millions Face a Tax Shock on Social Security Back Pay.

Congress Is Racing to Fix It By: Martha C. White Martha C. White Writer | Joined February 2026 Has also written: When Can You Start Filing Taxes? Can TrumpRx Really Save You Money on Prescription Drugs? Here's How to Tell Starbucks Comeback?

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Is Your Jewelry Properly Insured? See full bio Editor: Katherine Peach Katherine Peach Associate Editor | Joined January 2025 Katherine Peach is an associate editor with a focus on news and email at Money. She didn’t always intend to write about money. She’s a classically trained pianist who dreamed of becoming an archaeologist. However, in 2007 Katherine began working in financial publishing as an editor for Agora Inc. (Apparently, unearthing ideas about improving your personal finances isn’t such a bad career alternative!) Katherine’s writing and editing work has been featured in Investing Daily, Clever, Investor Junkie, The Palm Beach Letter, Truth & Plenty, Independence Monthly, NICHE, AmericanStyle, AntiqueWeek, Millennial Money, Money Done Right, TheStreet, Sure Dividend and many others. Katherine holds a Bachelor of Arts in Ancient Studies with concentrations in Archaeology and Ancient Languages and a minor in Literature from the University of Maryland, Baltimore County. She is a member of Phi Beta Kappa. Has also written: Stamp Prices Won't Rise This Month, but These USPS Shipping Costs Will Debit Card Fraud Is on the Rise. Here's What I Did When It Happened to Me New Bill Aims to 'Actually' End Taxes on Social Security Inflation's Silver Lining: The Social Security COLA Estimate for 2026 Is Up Social Security Recipients Are on Track for a 2.5% Raise Next Year See full bio Published: Feb 13, 2026 8:30 a.m. EST 6 min read Money; Getty Images A bipartisan "fix" to Social Security benefits for public-sector retirees could lead to a big tax hit for those Americans. Lawmakers are racing the clock before taxes come due on April 15.

The Social Security Fairness Act (SSFA), passed by Congress in late 2024, provided big lump-sum back payments and higher monthly benefits for millions of public-sector retirees covered by certain pensions who received lower or no Social Security benefits. Those back payments started going out in February of last year, and recipients started receiving higher monthly checks starting with their March benefits. While this was welcome news for recipients, here’s the rub: The lump sums were based on payments that should have been made over the course of many years, averaging $6,710, according to the Social Security Administration. The IRS requires that taxes on those payments be paid in the year they were received, which means some retirees could face an unpleasant surprise when they fill out their tax returns this year. Ads by Money. We may be compensated if you click this ad.AdProtect your retirement with a Reverse MortgageIf you are over 62, a Reverse Mortgage from Longbridge Financial (NMLS# 957935) can help you take care of expenses or even invest in things that will improve your quality of life. Click on your state to learn more.HawaiiAlaskaFloridaSouth CarolinaGeorgiaAlabamaNorth CarolinaTennesseeRIRhode IslandCTConnecticutMAMassachusettsMaineNHNew HampshireVTVermontNew YorkNJNew JerseyDEDelawareMDMarylandWest VirginiaOhioMichiganArizonaNevadaUtahColoradoNew MexicoSouth DakotaIowaIndianaIllinoisMinnesotaWisconsinMissouriLouisianaVirginiaDCWashington DCIdahoCaliforniaNorth DakotaWashingtonOregonMontanaWyomingNebraskaKansasOklahomaPennsylvaniaKentuckyMississippiArkansasTexasLearn More A new proposal wants to shield beneficiaries from big tax bills triggered by those payments.

The No Tax on Restored Benefits Act, introduced in February, would create a one-time carve-out to exclude the lump-sum payments from income tax. Rep. Lance Gooden (D-TX), who introduced the bill, said it would protect these retirees from what he characterized as “an unexpected, steep tax burden” brought about by the SSFA. The bill “guarantees that they keep every dollar of the benefits they have rightfully earned,” Gooden said in a statement. The legislation has been taken up by the House Ways and Means Committee; its future and potential timeline of passage is uncertain, but it’s worth noting that the Social Security Fairness Act passed by broad bipartisan margins. Latest plot twist in Social Security drama Taxes on Social Security have long been a hot-button issue, but the topic has gotten more visibility lately for a number of reasons. On the 2024 campaign trail, President Donald Trump promised to eliminate taxes on retirees’ Social Security benefits. He was unable to deliver that, but his pledge morphed into the “senior bonus" included in the One Big Beautiful Bill, or OBBB, passed by Congress last year. This temporary provision lets people 65 and up who earn less than $75,000 ($150,000 for couples) claim an additional $6,000 tax deduction between now and 2028. The framework for taxing Social Security benefits was far from straightforward even before the OBBB and the Social Security Fairness Act. While retirees have to pay taxes on earnings from sources including part-time jobs, interest and 401(k) withdrawals, Social Security has historically been taxed differently, with retirees who earn less than $25,000 ($32,000 for couples) paying no tax on their benefits at all. (In addition, only nine states still tax Social Security benefits.) For higher-income beneficiaries, both the percentage of benefits that are federally taxed as well as the tax rate adjust based on income. Legislation introduced earlier this year by Sen. Ruben Gallego (D-AZ) would have simplified retirees' tax preparation by eliminating federal taxes on Social Security benefits entirely. Currently, about 40% of Social Security recipients pay at least some tax on those benefits, according to the agency. “Trump claimed he ended taxes on Social Security. My bill actually does it," Gallego said in a statement announcing the You Earned It, You Keep It Act. Gallego proposed making up for the loss of tax revenue by increasing the cap on Social Security payroll contributions, which some say unfairly benefits high-income earners. "The ultra-wealthy barely pay into the system at all,” he said. Lawmakers face a looming funding crisis The idea of increasing or even eliminating the payroll tax cap has been floated over the years as a way to help stabilize the long-term solvency of the nation’s benchmark retirement program. Two trust funds currently supplement the money the government takes in to pay out Social Security benefits. If lawmakers don't intervene, that money will be depleted by 2032, a new Congressional Budget Office report warns. That's earlier than previous calculations have projected. Once the trust funds are drawn down, this would trigger an automatic cut of roughly 20% in benefits under current law. Some express concern that eliminating taxes on SSFA lump-sum payments will contribute to this erosion. "This legislation worsens Social Security finances and will increase the size of any benefit cut or tax increase needed to achieve solvency," Karen Smith, a senior fellow at the Urban Institute, says via email. One analysis estimated that eliminating the cap entirely could make up for as much as 73% of Social Security’s projected shortfall — without any other adjustments or reductions in benefits. Gallego's bill would have raised the cap from its then-current level of $176,100 to $250,000. (The cap, which is adjusted for inflation, rose to $184,500 for 2026.) At that higher level, the revenue collected would be enough to keep Social Security fully funded through 2058, Gallego said. Although far less drastic than repealing the cap entirely, the legislation so far has not advanced out of committee. Ads by Money. We may be compensated if you click this ad.AdWith a Reverse Mortgage, you can invest in your future starting todayWork with a licensed Longbridge Financial (NMLS# 957935) representative today.Learn More More from Money: What's New for Social Security in 2026? These 5 Changes Start in January Social Security's Confusing 'Full Retirement Age' May Get a Rebrand Democrats and Republicans Actually Agree on These Ideas to Fund Social Security SHOWHIDEAds by Money. We may be compensated if you click this ad.AdGet the most out of your Reverse Mortgage with Longbridge (NMLS# 957935)Learn More