Retiree Tax Relief and Fiscal Responsibility Act of 2025

This Act amends the Internal Revenue Code of 1986 to establish a maximum income tax rate of 15% on the first $50,000 of pension income received by an individual taxpayer in a taxable year. For purposes of this section, 'pension income' includes distributions from qualified retirement plans under section 401(a), section 403(b) annuities, section 457(b) plans, and traditional individual retirement accounts under section 408. The $50,000 threshold shall be adjusted annually for inflation using the Consumer Price Index for All Urban Consumers. The benefit of the reduced rate phases out for taxpayers with adjusted gross income exceeding $100,000 ($200,000 for married filing jointly), and is completely eliminated for taxpayers with adjusted gross income above $150,000 ($300,000 for married filing jointly). The phase-out is calculated by reducing the amount of pension income eligible for the 15% cap by 10% for each $1,000 (or fraction thereof) of adjusted gross income above the threshold. To offset the revenue loss from this rate reduction, the Act repeals the deduction for qualified business income under section 199A for taxpayers with taxable income exceeding $400,000 ($600,000 for married filing jointly). The Joint Committee on Taxation shall estimate the revenue effect of this Act and certify that the offset is sufficient to maintain revenue neutrality over the 10-year budget window. The Secretary of the Treasury shall issue regulations to implement this section, including rules for the phase-out and anti-abuse measures. The Internal Revenue Service shall administer the cap and phase-out through existing tax return forms and instructions. Any taxpayer who erroneously claims the reduced rate shall be subject to the accuracy-related penalty under section 6662, unless reasonable cause is shown. This Act shall take effect for taxable years beginning after December 31, 2025, and shall sunset after five taxable years, unless reauthorized by Congress. The Department of the Treasury shall submit a report to the House Committee on Ways and Means and the Senate Committee on Finance within 90 days after the third calendar year of implementation, evaluating the distributional effects and compliance costs.