Trump’s New Senior Deduction: One Big Beautiful Bill’s Impact on Seniors
The One Big Beautiful Bill, or OBBB, introduced a new “senior deduction” for taxpayers who are at least 65 years old. The new deduction has repeatedly been referred to as a “bonus”—causing widespread confusion among older taxpayers, many of whom believe that they will receive a $6,000 bonus check that’s similar to the economic stimulus payments made at the height of the COVID-19 pandemic. Other clients may mistakenly believe that their Social Security benefits will no longer be subject to tax—partially because of a confusing email sent by the Social Security Administration to beneficiaries after the OBBB was signed into law. Clients are bound to have any number of questions over the impact of this new deduction, making it particularly important to understand both how the deduction functions and the system governing federal income taxation of Social Security benefits generally.
New Senior Deduction: Basic Mechanics
The new senior deduction provides a $6,000 deduction for taxpayers who have reached age 65 by the end of the tax year. The mechanics are relatively simple. The senior deduction is an above-the-line deduction, so it’s available regardless of whether the taxpayer itemizes or elects to take the standard deduction.
The deduction is subject to phaseout based on modified adjusted gross income. Once a taxpayer’s MAGI reaches $75,000 ($150,000 for joint returns), the deduction gradually phases out.
The deduction is temporary and, under current law, will be available for 2025, 2026, 2027 and 2028.
Taxation of Social Security Benefits
Social Security benefits are subject to a unique set of tax rules—yet they are subject to federal income taxation. If a taxpayer’s (1) adjusted gross income plus (2) one-half of the Social Security benefits plus (3) tax-exempt interest income received during the tax year (i.e., “combined income”) exceeds certain base amounts, a portion of the taxpayer’s Social Security benefits are includible in gross income (taxable as ordinary income).
Based on this calculation, single filers and heads-of-households with between $25,000 and $34,000 in combined income typically see up to 50% of their Social Security benefits subject to tax. If their combined income is more than $34,000, up to 85% of their benefits are taxed.
For married couples, the combined income thresholds are increased so that couples with combined income of between $32,000 and $44,000 see up to 50% of their benefits taxed. When combined income exceeds $44,000, up to 85% of benefits are taxed.
Unlike many other code provisions, these amounts are not adjusted each year to account for inflation, resulting in a situation where even very low-income Social Security beneficiaries are paying taxes on at least a portion of their benefits.
Interaction Between the Senior Deduction and Social Security Taxation
The senior deduction does not technically change the rules governing how Social Security benefits are taxed.
However, the deduction is taken as an above-the-line deduction. That means it may indirectly reduce the amount of Social Security benefits that are taxed because the deduction is subtracted when calculating the taxpayer’s “adjusted gross income” for purposes of calculating the amount of Social Security that is taxable.
Taxpayers with combined income that is between the relevant “base amounts” and the $75,000/$150,000 phase-out window may see a reduction in their tax liability because of the deduction itself (especially when combined with the increased standard deduction). That said, their tax liability will not be completely eliminated unless the deduction causes combined income to fall below the lower base amount.
The new senior deduction may provide a valuable benefit to reduce the overall tax liability of many seniors—particularly, those with combined income above the base amount and below the phaseout range.
Conclusion
While the additional senior deduction will undoubtedly reduce federal income tax liability for many older Americans, it’s important to remember that it does not amount to an elimination of tax on Social Security benefits.