One Big Beautiful Bill Act, Taxation of Social Security, and New Senior Deduction

As you have likely read, last week Congress passed the One Big Beautiful Bill Act, and the President signed it into law.

You can find the full text of the law here.

I’m not going to provide a full write-up of the various tax changes made by the new law. Instead, please see this excellent summary from the AICPA’s The Tax Adviser publication. (Don’t stop reading when you get to the heading “Business Provisions.” There’s a lot of additional stuff relevant to individual taxpayers beyond that point, such as the elimination of various environmental-related credits.)

Every time there’s a new piece of tax legislation, the most common type of question I receive is, “does the new law change _____?”

The challenge is that there’s no way to list all of the things that didn’t change. It’s a big law that makes a bunch of changes, but naturally most things in our tax code are not changed. If you want to be sure, you simply have to dig into the text of the Act itself.

One thing I do want to touch on though is the taxation of Social Security benefits. The SSA put out a press release that has caused a lot of confusion. The release mentions that many seniors will no longer have to pay tax on their Social Security benefits. Many people have understood this to mean that the Act changes the unique tax treatment of Social Security benefits. But that is not the case.

Internal Revenue Code section 86 is where we find the rules regarding the unique tax treatment of Social Security. The new Act does not make any change whatsoever to IRC § 86. To reiterate, the IRC section that determines taxation of Social Security benefits was not changed at all by the new law. Rather, the press release from the SSA is just speaking to the effect of the new $6,000 senior deduction for people age 65+.

For tax years 2025-2028, there’s a new $6,000 deduction for anybody who is at least age 65 by the end of the year. (For a married couple filing jointly who both qualify, it’d be $12,000. Married people filing separately do not qualify.)

The deduction phases out as your modified adjusted gross income exceeds $75,000 ($150,000 if married filing jointly). Specifically, the $6,000 deduction per person is reduced (but not below zero) by 6% of the excess of your MAGI over the applicable threshold. (In this case, MAGI is defined as adjusted gross income, plus any excluded foreign income or excluded income from US territories.)

In other words, for a single person age 65+, the deduction would phase out completely as their MAGI goes from $75,000 to $175,000. And for a married couple filing jointly, both age 65+, the $12,000 deduction would phase out completely as their MAGI goes from $150,000 to $250,000.

Note that, as with basically anything that phases in or phases out based on income level, this is another thing that can cause your actual marginal tax rate to be different than just your tax bracket. But in this case, the effect is relatively minor. For a single person age 65+, through the applicable range of income, your marginal tax rate will be 1.06-times whatever it would otherwise have been (e.g., instead of a 22% rate it would be 23.32%). For a married couple both age 65+, through the applicable range of income, your marginal tax rate will be 1.12-times whatever it would otherwise have been.