If you’ve ever felt frustrated by why Social Security benefits are taxed, you’re not alone. It can feel unfair, after all, we all pay into Social Security with after-tax dollars via FICA taxes throughout our working years, only to have those benefits potentially taxed again in retirement.
Recent tax law changes from the One Big Beautiful Bill Act have added a new wrinkle to this conversation. While many hoped that Social Security taxation would be eliminated altogether, the new law did not go that far. However, it did introduce a temporary new deduction for seniors that could help reduce taxable income. Let’s break down what’s changing, what’s staying the same, and how you should plan ahead.
Is Social Security Still Taxable?
In short: yes. The way Social Security is taxed has not changed. Here’s a quick refresher on how the taxation works:
- For single filers: Add all of your other income (wages, pensions, IRA withdrawals, dividends, capital gains, etc.) plus half of your Social Security benefits. If this combined income exceeds $25,000, part of your Social Security becomes taxable. Up to 85% of your Social Security could become taxable as income.
- For married couples filing jointly: The threshold is $32,000, not double the single threshold as you might expect. If your combined income exceeds this level, part of your Social Security becomes taxable, up to 85% of the benefit.
This formula hasn’t changed under the new law.
What Did the New Tax Law Actually Change?
Rather than eliminating the taxation of Social Security, the new law introduced a temporary “Senior Deduction.”
If you’re eligible, this deduction reduces your taxable income by $6,000 if you file as a single taxpayer or $12,000 if you’re married filing jointly and both spouses qualify.
To qualify, you must be age 65 or older, and your income must fall below certain thresholds. Specifically, the deduction begins to phase out when the income exceeds $75,000 for single filers or $150,000 for married couples filing jointly. It phases out completely once income reaches $175,000 for single filers and $250,000 for married couples filing jointly.
Is This Deduction in Addition to the Existing Senior Deduction?
Yes! The current tax code already provides an additional standard for those age 65 or older:
- $2,000 extra for singles
- $1,600 extra per person for married couples
This new $6,000 (or $12,000) deduction is in addition to that existing benefit.
Even better: You can claim this new deduction whether you take the standard deduction or itemize deductions on your tax return.
Do You Have to Be Receiving Social Security Benefits to Claim It?
No. Eligibility is not tied to whether you are receiving Social Security. As long as you are 65 or older and meet the income requirements, you qualify, regardless of whether you’ve started taking Social Security benefits or are delaying them.
When Does This Deduction Take Effect and How Long Will It Last?
This deduction is available starting in 2025 but is temporary, set to expire at the end of 2028.
How Should This Impact Your Tax Planning?
This change could have a meaningful effect on your retirement income strategy and tax planning decisions.
Here are a few key planning considerations:
- Roth conversions: Since Roth conversions increase your taxable income, you may want to limit the amount you convert each year to remain eligible for the full deduction.
- Harvesting capital gains: Realized capital gains add to your income, potentially pushing you over the deduction phaseout thresholds.
- Withdrawal strategy: The types of accounts you withdraw from (taxable, tax-deferred, or tax-free) will matter even more when planning to stay under these income thresholds.
If you’re age 65 or older, or approaching that milestone, you should start factoring this new deduction into your retirement income strategy immediately.
Tax planning is an integral part of your overall financial life. Work closely with a CERTIFIED FINANCIAL PLANNER™ who can help you optimize your strategy and take full advantage of the new deduction.
Jared Moxness is a CERTIFIED FINANCIAL PLANNER™ at Korhorn Financial Group. He also holds his Certified Public Accountant (CPA) license and Certified Exit Planning Advisor (CEPA) designation.
