One of President Donald Trump's biggest promises to seniors during his 2024 campaign was that he would eliminate taxes on Social Security income. Taxes on retirement benefits can be complex and place an extra burden on households relying on Social Security to make ends meet.
The Social Security Administration (SSA) sent out a press release following the passage of the "big, beautiful bill" saying the bill, signed by Trump on July 4, "ensures that nearly 90% of Social Security beneficiaries will no longer pay federal income tax on their benefits."
While the press release makes it sound like President Trump kept his promise to most senior households, the truth about the new tax bill may surprise you.
Image source: Getty Images.
How the government taxes Social Security
Before we dive into the details of how seniors are affected by the new law, it's important to understand how the government currently taxes Social Security benefits.
The government uses a metric called combined income to determine how much, if any, of your benefits are taxable at the federal level. Your combined income is equal to half of your Social Security benefits, plus your adjusted gross income, plus any untaxed interest income. If your combined income exceeds certain thresholds, a portion of your benefits become taxable as ordinary income. Here are the current thresholds.
| Taxable Portion of Benefits | Combined Income (Single) | Combined Income (Joint) |
|---|---|---|
| 0% | Less than $25,000 | Less than $32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | More than $34,000 | More than $44,000 |
Data source: Internal Revenue Service.
You might notice those thresholds are extremely low. That's because Congress hasn't updated them since the early '90s and there's no inflation adjustment built in. That means more and more seniors are finding their Social Security benefits subject to income taxes each year as their income climbs.
Still, quite a few households manage to keep their combined income below those thresholds either through circumstances or clever tax planning. As a result, the bottom 40% of households by income pay an average of less than 1% of their Social Security benefits in taxes.
The new tax bill doesn't change anything about how much of your benefits are included as taxable income on your federal tax return. Retirees are still required to include up to 85% of their benefits with relatively low thresholds to get there.
Here's what's included in the new law
Instead of changing how much of your Social Security benefits count as taxable income, the new bill adds a special tax deduction for seniors age 65 and up. Those with incomes below $75,000 or $150,000 for single filers and joint filers, respectively, can claim a $6,000 deduction, while those with higher incomes can claim a smaller deduction until their incomes places them out of the group that qualifies for any deduction. The deduction is phases out at incomes above $175,000 and $250,000 for single filers and joint filers, respectively.
That deduction -- meaning you don't pay tax on that amount -- could be seen as offsetting the tax on Social Security benefits, but that's just mental accounting. The truth is it has nothing to do with Social Security at all. It doesn't apply to anyone younger than 65 collecting Social Security retirement or disability benefits. It also doesn't only apply to taxable Social Security income. The $6,000 could be used to offset taxes on any form of income, including wages, retirement account withdrawals, capital gains, dividends, or business income.
Importantly, the deduction is only available for the next four years. So if you won't be turning 65 until 2029, you're out of luck.
A small group of households can get a lot of benefits from the new tax bill, though.
The gift middle-class seniors just received
Since the $6,000 deduction for seniors is much more flexible than elimination of the tax on Social Security income, some retirees may have an opportunity to save a lot of money on their tax bills over the next four years even if they are not yet collecting Social Security.
If you're already paying low tax rates right now, you could still benefit from the law by taking a few strategic steps to set yourself up for a lower tax liability in the future.
For those over 64 not yet collecting Social Security, it could be a great opportunity to make Roth conversions from a retirement account. The benefit of Roth conversions is that they'll also reduce your required minimum distributions later, giving you more flexibility in your retirement account withdrawals. Additionally, since Roth withdrawals don't count toward your combined income, you'll be able to keep your tax liability on your future Social Security benefits lower.
The additional $6,000 per-person deduction means a qualified couple could convert an extra $12,000 per year to a Roth account without any additional tax liability. That's $48,000 over four years that's completely tax-free and can compound well into your golden years.
Similarly, you could take capital gains in your taxable brokerage account without increasing your tax liability over the next four years by using the deduction to offset them. Since there's no wash sale rule on capital gains, you could buy a security back right after you sell it without repercussions. Taking gains now while you have the additional tax deductions provides similar benefits to Roth conversions.
Just remember, you need to ensure your income remains below $75,000 if you're single or $150,000 if you're married if you want to use the full $6,000 deduction. But if you can manage to control your taxable income, you could get a lot out of the new tax law.
Or if you're already well positioned for minimizing taxes in retirement, you can simply take the $6,000 deduction and reduce your taxes each year for the next four years.
Don't let the government mislead you into thinking the tax break only applies to Social Security. While the benefit of the new deduction will only go toward some households, if you're part of that group, you could come out way ahead over the next four years.
