Episode 2: Will My Social Security Benefit Be Taxed Moving Forward?
Episode 2
Will My Social Security Benefit Be Taxed Moving Forward?
Published on July 31st, 2025
The passage of the recent tax legislation, One Big Beautiful Bill Act (OBBBA), has created significant confusion around how Social Security will be taxed. Many retirees are asking if their benefits will now be tax-free. In this episode, Garrett Crawford breaks down the reality of the new law, explaining that the primary change is not to Social Security taxation itself, but the introduction of a new, substantial "Senior Deduction." We'll cover who qualifies for this deduction, the specific income phase-outs that could affect HNW retirees, and the critical planning dilemma it creates when considering strategic Roth conversions.
Key Tax Planning Questions
Click Below To See The Answer
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One of the more confusing aspects of the One Big Beautiful Bill Act pertains to Social Security. During the legislative process, there was much discussion about "no taxes on overtime," "no taxes on tips," and "no taxes on Social Security." However, the One Big Beautiful Bill Act did not alter how Social Security benefits are taxed; the existing IRS formulas remain in effect.
What was enacted into law is the new Senior Deduction. This deduction indirectly lowers the overall amount of taxes paid by individuals aged 65 and older. Importantly, you don't need to be receiving Social Security benefits to qualify for this new $6,000 Senior Deduction per individual. In essence, many Americans will still pay federal taxes on their Social Security benefits, but their overall tax burden will be reduced if they are eligible for this senior deduction.
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The Senior Deduction is a new, temporary deduction established by the One Big Beautiful Bill Act (OBBBA), which became law on July 4th, 2025. This deduction is set to be in effect for tax years 2025, 2026, 2027, and 2028.
It allows individuals aged 65 or older to claim an additional $6,000 deduction on their federal tax return. For married couples, each spouse who is 65 or older can take this $6,000 deduction, totaling $12,000. This is in addition to the existing "Older Than Age 65" additional standard deduction, which for 2025 is $1,600 per qualifying individual.
However, it's important to note that the Senior Deduction is subject to income phase-out levels. For single filers, the deduction begins to phase out when Modified Adjusted Gross Income (MAGI) exceeds $75,000 and is completely phased out at $175,000. For married couples filing jointly, the phase-out begins at $150,000 MAGI and is fully phased out at $250,000. This deduction is also available to those who itemize their deductions, not just those taking the standard deduction.
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To be eligible for the Senior Deduction, you must be age 65 or older by the end of the tax year. The amount of the deduction you can claim is based on your Modified Adjusted Gross Income (MAGI).
If you file your tax return as a single individual, you will receive the full $6,000 Senior Deduction if your MAGI is below $75,000. If your MAGI is between $75,000 and $175,000, you will receive a partial Senior Deduction benefit, and you will receive no benefit from the Senior Deduction if your MAGI is $175,000 or above.
If you file your tax return as Married Filing Jointly, you will receive the full $6,000 Senior Deduction per eligible spouse (up to $12,000 total if both spouses are 65 or older) if your MAGI is less than $150,000. If your MAGI is between $150,000 and $250,000, you will receive a partial Senior Deduction benefit, and you will receive no benefit from the Senior Deduction if your MAGI is $250,000 or above. The deduction is gradually reduced within these phase-out ranges.
Full Episode Transcript
Adam: Good morning and welcome to Retirement Tax Matters, here with Adam and Garrett.
Garrett: Good to be here.
Adam: We're ready to tackle a new topic for you today. Unless you've been living under a rock, you've probably seen some information about a big, beautiful bill that just passed. It looks just like paper and words to me, but I guess they've said that it's beautiful, so we'll take their word for it. We want to dig into what some of that information is being brought to us. I know there's been a lot of conversation around no tax on Social Security and I really wanted to pick your brain this morning, Garrett, on what is really in the bill and how it could affect either clients or people preparing for retirement, people already in retirement. Maybe you could bring some clarity into what the bill actually did for people thinking about Social Security or on Social Security.
Garrett: Well, sure. We were talking this week that we didn't decide to start a Retirement Tax Matters podcast because a giant tax law was being passed in Congress, but I would call this fire by baptism. We're going to hop right into this, and there's a lot to talk about. So, I think initially when we talked about doing this, we had some generic things that we were going to start off with, but it's looking like probably the next quite a few episodes we'll just be diving deeper into each one of these new tax issues that retirees are going to come across.
Garrett: I think Social Security and some of those updates in the "Big Beautiful Bill" is probably a great place to start because even when it came out—I guess the drafts were starting to appear a couple of days before July 4th and that was signed into law on the fourth—I think probably the thing that stuck out to me most is what we're talking about today. There's going to be a lot of our clients, a lot of retirees where this is going to be a big issue and probably save them some tax dollars.
Garrett: So why don't we start there and let's just talk about some of the context around the Big Beautiful Bill and Social Security. I know during the election process, one of President Trump's messages that he was putting out was no taxes on Social Security, no taxes on tips, and no taxes on overtime. And since I had heard those campaign promises, campaign goals, I was almost incredulous a little bit that all three of those could be in the bill because those are all three very expensive things to put in a tax law bill. What we saw is he did check those boxes for the overtime and the taxes on tips, but the Social Security one, even as of a couple of days ago as I've been reading about it, I think there's some additional clarity that we can bring to the table that wasn't even readily apparent to me.
Garrett: When we came across the campaign trail, we talked about no taxes on Social Security. There is something called a "Senior Deduction" that was added in the Big Beautiful Bill. It's a $6,000 deduction for those over age 65. I think probably everybody that would listen to this, if you're on Social Security or close, you probably got that email. I had quite a few emails sent to me from clients from the Social Security Administration. I think that'll be a marker in a lot of people's minds when this bill passed. And it said that 90% of Social Security beneficiaries would not be paying taxes on their benefits. That's pretty cool.
Garrett: But in the details, if we go a little bit deeper, there actually was not any change in the way that Social Security benefits are taxed. Instead, what has happened is that there's been a deduction that you can take on your tax return if you're older than 65. And it has nothing to do with whether you are on Social Security or off Social Security. So if you're 65, maybe you're waiting until 70 to start Social Security, you can take advantage of that Social Security deduction.
Adam: So that's reducing your overall income, not just your Social Security income, is what you're saying.
Garrett: Correct. Let's say we have a married couple filing jointly. Each spouse is eligible to reduce $6,000 of their taxable income so long as their modified adjusted gross income—their MAGI, and I think for most people, you can just think all the income that you have coming in, whether it's from pensions, 401(k) withdrawals, you've got capital gains, add up all that stuff. There's some nuance there, but for most people, that's an easy way to do it. If you're married and that number that you come up with is less than $150,000, you are eligible for the full $6,000 deduction for each spouse. So that's another $12,000 that you can pull off.
Garrett: There is a $100,000 phase-out between $150,000 for married filing jointly and the top of the phase-out, which is $250,000. So if your income is over $250,000, you're not going to get any of that Social Security Senior Deduction. If it is below $150,000, you're going to get the full $12,000 Senior Deduction, and if you're in between, you're going to get a partial amount.
Garrett: As I was looking at it this morning and preparing for this discussion about the Senior Deduction, it's kind of amazing to me that what this bill did is it made permanent the higher standard deduction. I think that number for 2025 is $31,500 for married filing jointly. We also have the new Senior Deduction, which is $6,000 per spouse, so we get to add another $12,000 to the standard deduction as long as both spouses are above 65. And then on top of that, I don't know if you're into your taxes, maybe you recognize this, but there's also another senior deduction if you're over age 65, and that's going to be $1,600 for 2025.
Garrett: I did my math here this morning and if we add all that up for a married couple filing jointly, both over age 65 whose modified adjusted gross income is less than $150,000, that's $46,700 that you get to reduce from your ordinary income. I think a lot of people are going to see a bigger tax refund at the end of the year. You're not going to pay as much in, and I would say that's a big win for seniors.
Adam: Yeah, and with that as well, that's also affecting your income. So, things like Roth conversions, there could be more opportunity for things like that. Is that correct?
Garrett: I think I'm going to toot this horn a lot through this series about the Big Beautiful Bill because almost every plan that I've looked at, it's been interesting. In the past, I've always focused on a marginal rate—12%, 22%—that's a big gap. And I think I'm going to see a lot more of these Senior Deductions, people entering the phase-out areas of $150,000 to $250,000. We'll talk about this in a future series, but there's a new charitable deduction for people that are on this that are taking a standard deduction; they can actually do some gifts to charity, which is going to be really important for almost everybody that you'll have even more tax savings.
Garrett: But what it's doing is when you combine it with the historically low tax brackets, some of the handouts the government is giving as far as less taxes on income, Senior Deductions... taxes are really at historically low levels for seniors. But there's a catch. Every time we consider a Roth conversion, it's going to take away some of those Senior Deduction benefits. And I think there's going to be a tension there that people don't want to give up that deduction. But the more I look at it, the more I think we've got to retrain our brain that taxes are at their historically lowest point ever. And instead of being scared to give up some of those tax benefits, let's use this time as a way to leverage lower taxes and go ahead and convert money to Roth.
Garrett: I've got a lot of reasons behind that, but less taxes through the Senior Deduction, a higher standard deduction for retirees... I think it's going to be an exciting time over the next few years. So, Senior Deduction, pay attention to it. We are in our financial planning with clients and I think it'll be interesting over the next three years as that's implemented.
Adam: Yeah, absolutely. Well, cool. Garrett, I appreciate the information and some clarity there because I think for a lot of people, there's maybe some confusion on if Social Security is no longer being taxed or if there are deductions. That's helpful as people plan for years to come and hopefully people are meeting with tax preparers or their financial advisor to think through what opportunity is there. It seems like there's a lot of opportunity for planning moves and pieces of the puzzle to be thrown in there right now.
Garrett: And I was going to add too, I'm not sure if I said it, but just to make sure, this new Senior Deduction is not permanent. It goes for the next three years, so 2025 through 2028. It's not forever, but it's a good tax savings for the moment.
Adam: Similar scenario that we were in this year where it could sunset, but you could also see it extended. So it's another one of those where they like to leave us up in the air and say, "Hey, you got it for now, but maybe you'll have it here four or five years down the road, maybe you won't."
Garrett: Yeah, we'll have to wait and see, but it's always interesting and people never like those things taken away from them. So we know we have a three-year window and now is the time to plan around that.
Adam: Yeah, that sounds great. Well, thank you for the information. Thank you all for joining us. Appreciate you guys tuning in to Retirement Tax Matters and hope you all have a great rest of your day.
Garrett: All right, see you next time.