Bill would shield restored Social Security benefits from tax

A bipartisan proposal in Congress could resolve an unexpected tax problem facing millions of retirees this filing season.

The issue stems from the Social Security Fairness Act, signed into law in early 2025, which repealed two long-standing provisions that had reduced or eliminated benefits for employees whose jobs were not covered by Social Security taxes. While the change restored benefits for teachers, firefighters, police officers and other workers, it also triggered large retroactive payments — and, for many, a surprise tax bill.

Now, lawmakers are attempting to clean up that unintended consequence. The No Tax on Restored Benefits Act, introduced in February by Republican Rep. Lance Gooden, would exclude certain retroactive Social Security payments from taxable income. Supporters say the bill would prevent retirees from being penalized for receiving years of delayed benefits all at once.

Democratic Rep. Chellie Pingree, a cosponsor, said the bill was designed to fix benefit inequities, not create new financial burdens for retirees.

"For hundreds of thousands of Americans, the bipartisan Social Security Fairness Act was truly transformative, ensuring they received the benefits they deserved," Pingree said in a statement. "But it was never intended to saddle widows, low-income seniors and dedicated public servants with an unexpected tax bill."

The bill has received support from a number of labor and advocacy organizations, including the Texas Retired Teachers Association, the National Fraternal Order of Police and the International Association of Fire Fighters.

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How restored benefits turned into a tax problem

The Social Security Fairness Act repealed the Windfall Elimination Provision and the Government Pension Offset, two rules that had long reduced or eliminated benefits for workers who spent part of their careers in public-sector jobs not subject to Social Security taxes.

Because the repeal was made retroactive to January 2024, the Social Security Administration recalculated past benefits and issued one-time lump-sum payments in 2025 to affected retirees. 

According to the SSA, beneficiaries received an average lump-sum payment of $6,710. But some retirees received much larger payments. David Demming, the founder and principal of Demming Financial Services in Aurora, Ohio, said his firm saw adjustments for more than 50 clients, with the largest exceeding $25,000.

Under current IRS rules, Social Security benefits are taxable in the year they are received, regardless of when they were earned. As a result, retirees who received large catch-up payments in 2025 must report that income on their 2025 tax returns, now being filed during the 2026 tax season.

That one-time income spike can have cascading consequences. A large retroactive payment can push a retiree into a higher federal income tax bracket, increase the share of Social Security benefits subject to taxation and, in some cases, trigger higher Medicare premiums.

Joon Um, a tax advisor and CFP at Secure Tax & Accounting in Beverly Hills, California, said many clients who received retroactive payments were less surprised by the money than by the tax bill that followed.

"If the new bill makes those payments tax-free, it could reduce that extra tax burden and help avoid some of those ripple effects," Um said.

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What the new bill would change — and what it wouldn't

The No Tax on Restored Benefits Act would carve out a narrow exemption in the tax code. Specifically, it would exclude retroactive Social Security payments that resulted from the repeal of WEP and GPO from federal taxable income.

The bill would not eliminate taxes on Social Security benefits more broadly, nor would it change benefit formulas or Social Security trust fund operations. Instead, it is designed to address the timing mismatch created when years of underpaid benefits arrive in a single year.

If enacted, the change would apply to the 2025 tax year — the returns currently being filed — and would only affect lump-sum payments tied to the repeal of WEP and GPO. Ongoing monthly benefits would continue to be taxed under existing rules.

That distinction is important. Proposals to eliminate taxes on Social Security altogether have circulated for years and remain politically contentious. The current bill is far more targeted, focusing only on the retroactive payments generated by the fairness law.

Demming said the ongoing increase in monthly benefits adds complexity of its own, because higher baseline Social Security income can permanently shift a retiree's tax profile and exposure to higher Medicare premiums.

"As with any taxable event, we plan for safe harbor tax payments to avoid penalties," he said. "This is true for the lump sums, but even more so with the ongoing … taxes on increased Social Security [payments]."

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Planning amid legislative uncertainty

For now, affected retirees must comply with existing IRS rules and report retroactive payments as income on their 2025 returns. The bill has been introduced and referred to the House Ways and Means Committee, but its timeline and prospects remain uncertain.

Even if lawmakers act quickly, the IRS would need to issue guidance clarifying how the new exclusion would be implemented.

In the meantime, advisors say clients should prepare based on current law rather than potential legislative changes. That means modeling the tax impact of lump-sum Social Security income, monitoring Medicare premium thresholds and planning for safe harbor payments to avoid penalties.