As our nation celebrated its independence this Fourth of July, President Trump signed the One Big Beautiful Bill into law.
And while the legislation contains many tax provisions that will impact U.S. savers, one in particular has both excited and confused many Americans: A new tax deduction intended to offset the taxation of Social Security benefits.
There’s much to celebrate for our clients when it comes to tax relief in this bill. But it’s important as financial advisors that we understand how this tax relief was provided – and how long it will last. After all, our clients will need our guidance navigating these changes.
So let’s dive into this new deduction.
During the 2024 Presidential campaign, President Trump was vocal that seniors should not have to pay taxes on their Social Security benefits. And with the passage of the One Big Beautiful Bill, President Trump is touting the fulfillment of this campaign promise.
But as with so many legislative initiatives, it’s the details that matter. And that’s especially true with this new provision.
{% icon icon_set=”fontawesome-6.4.2″ name=”Circle Arrow Right” style=”SOLID” height=”20″ purpose=”decorative” title=”Circle Arrow Right icon” %} First, some quick background:
The taxation of Social Security benefits is a relatively new phenomenon, passed in 1983 as part of the Social Security Amendments as a way to shore up the struggling Social Security trust fund. (Here’s a quick primer from the Tax Foundation on the formula used to determine taxation of an individual’s Social Security benefit – it’s not exactly straightforward.) Unlike other forms of income, the taxes paid on Social Security benefits go specifically to the Social Security and Medicare trust funds.
So what changed with the One Big Beautiful Bill?
First and foremost, the bill did not eliminate the taxation of Social Security benefits outright.
This is likely because the Senate was passing the legislation under reconciliation, a process that allows certain types of legislation to pass with a simple majority vote of 51, rather than the Senate’s usual supermajority standard.
So Congress got creative.
Instead of eliminating the taxation of benefits directly, the bill provides a new tax deduction available to Americans age 65+. The deduction amount is based on a saver’s modified adjusted gross income (MAGI). It starts at $6,000 for individual filers with up to $75,000 in annual income (and $12,000 for joint filers with up to $150,000 in annual income). The tax deduction then phases out at a rate of six cents per dollar over the income thresholds, completely phasing out at $175,000 of income for single filers and $250,000 of income for joint filers.
This deduction is provided in addition to the existing standard deduction and can also be used by Americans who itemize their deductions. It’s also available to all Americans age 65+, regardless of whether an individual has elected Social Security yet.
Okay, that’s a lot of information.
{% icon icon_set=”fontawesome-6.4.2″ name=”Circle Question” style=”SOLID” height=”20″ purpose=”decorative” title=”Circle Question icon” %} So what does it all mean for our clients?
First and foremost, it’s important for our clients to understand they will still pay applicable taxes on their Social Security benefits. Nothing in the One Big Beautiful Bill has changed the tax status of these benefits or the calculation of how these benefits are taxed.
However, clients age 65+ will potentially have up to $6,000 in new tax deductions they can take starting this year. So for many of our clients, their overall tax liability will go down.
And, of course, in mental math, clients are welcome to consider this new tax deduction an offset of the taxes paid on their Social Security benefits, as the President does. In the end, it’s the total amount of taxes paid that matters most to our clients, not necessarily where those taxes (or deductions) are generated.
One more important thing to note about this new tax deduction: It is temporary.
Under current law, this new deduction is only authorized for tax years 2025, 2026, 2027, and 2028. That means unless Congress votes to extend the deduction (and a future President signs the legislation into law), this deduction will go away after the 2028 tax year.
So, for the next four years, our 65+ clients will have a new deduction they can take on their taxes (if they’re filing with a qualifying income level). And they can take this deduction regardless of whether they’ve elected Social Security or chosen to defer it.
Net / net: Many of our clients will see their income tax bills lowered for the next four years. This will be important for advisors to account for when modeling Roth conversions and other tax-mitigation strategies.
Stonewood Financial’s Roth Done Right software will be updated to reflect the new deductions, so advisors like you can analyze the potential tax and IRMAA impacts of varying conversion patterns and options.
Of course, taxes on Social Security benefits are just one part of the Big Beautiful Bill. Your clients also want to hear from you about the bill’s impact on income tax bracket rates, estate taxes, and more.
{% icon icon_set=”fontawesome-6.4.2″ name=”Magnifying Glass Chart” style=”SOLID” height=”20″ purpose=”decorative” title=”Magnifying Glass Chart icon” %} For a complete overview of the legislation – and how to leverage it with your clients and prospects – check out this recording of a webinar I hosted last week, diving into the bill and its framework for clients.
Change in Washington is always an opportunity for client outreach and planning. Here at Stonewood Financial, we’re committed to providing you with the tools to make that outreach easy and effective.
About the Author
Becky helps your clients outsmart Washington and take control of their retirement. Making the complex simple and meaningful? It’s all in a day's work.
