New Tax Bill – Is Social Security Now Exempt From Tax?

There has been confusion about how the new tax bill (One Big Beautiful Bill Act – OBBBA) will impact how social security is taxed.

In short, the bill does not directly impact how social security is taxed – social security is still partially taxable for all but lower income taxpayers. However, the bill does include an extra deduction for seniors that will reduce taxes overall. But social security will still be taxable for many taxpayers.

What’s changing?

A portion of retirees’ social security benefits can be taxable at middle and higher incomes. The new tax bill does not directly change this.

However, the new bill does include an extra deduction for seniors – those reaching age 65+ before the end of the tax-year. The deduction is $6,000 for single taxpayers and $6,000 for each member of a married couple who is age 65 or older (married couples can get a total deduction of $12,000 if both spouses are 65+). So seniors are getting a tax benefit from the bill, but it is not nearly as advantageous as all social security being excluded from tax.

This deduction is scheduled to last from 2025 to 2028. It applies to taxpayers who use the standard deduction and those who itemize.

For example, Reese and Joy are both over 65 years old at the end of the year. They have $45k of itemized deductions. Now, with the new deduction, their total deductions are $57k (45 + 12 = 57):

If they are in the 22% tax bracket. The extra $12k deduction will save them $2,640 in tax (12,000 * 22%).

Given the structure of the additional deduction, taxpayers will want to be careful about recognizing additional income because of it. This may result in more of your social security benefit being taxable.

Do all seniors get this new deduction?

Not all seniors will get this new deduction – it phases out at higher levels of income.

Specifically, the deduction is reduced by 6% of the modified adjusted gross income (MAGI) above certain thresholds. The thresholds depend on filing status:

• Single. The deduction phases out between MAGI of $75k and $175k.

• Married filing jointly. The deduction phases out between MAGI of $150k and $250k. The limits for married couples will be reduced together.

  • For example, if Reese and Joy mentioned above have MAGI of $180k. Each of their $6,000 deductions will be reduced by $1,800 to $4,200 (180k – 150k = 30k * 6% = 1,800). Now their total senior deduction is $8,400 (4,200 * 2). When added with their itemized deductions of $45,000, their total deductions are now $53,400:

For most taxpayers, except those with foreign earned income and those living in a US territory, modified adjusted gross income should be the same as adjusted gross income (AGI). You can learn about how AGI is calculated in the summary article I wrote a couple of years ago.

How does this relate to your situation?

If you are interested in how the new tax bill will impact the taxation of your social security or any other part of your tax situation, feel free to schedule a meeting or contact me via email (crawford@ulmerfinancial.com).

I bring together clients’ investments and tax preparation in one place, so they don’t have to deal with multiple advisors. The goal is to make managing your money and filing your taxes easier.