New Senior Tax Break – Center for Retirement Research

Part of the recently passed tax bill includes what the administration calls “No Tax on Social Security.” The bill does not directly remove taxes from Social Security payments, but it does provide additional deductions for seniors subject to certain income limits. This provision could effectively reduce – or, in some cases, even eliminate – federal taxes paid by people aged 65+.

First, it should be noted that this tax cut makes Social Security’s difficult financial situation even worse. Social Security experts estimate that the new tax provisions will move up the trust fund drawdown date by about six months – from the 3rd quarter to the 1st quarter of 2034.

However, current beneficiaries will see the benefits of lower taxes. This blog post looks at how the new deduction works and how it may affect your federal income taxes.

How Deductions Work

To understand how this new tax break works, it’s helpful to know how deductions work. The following is a simple explanation of the standard deduction (this is not tax advice).

You start with gross income, which is the sum of all sources of taxable income. This amount usually includes work income, most pensions, taxable investment income, and up to 85 percent of your Social Security income. The taxable share of your Social Security is based on what’s called “gross income,” which is equal to half of your Social Security benefit, plus tax-free interest, and all other taxable income. If your combined income is more than $44,000 for married couples filing jointly or more than $34,000 for single filers, 85 percent of Social Security benefits are taxable. (At lower rates, individuals are taxed up to 50 percent of their capital gains; below these limits, gains are not taxed at all.)

After adding up your gross income, including taxable Social Security, you take deductions. You have the option to combine items and itemize deductions, but most people do better by taking the standard deduction. People age 65+ also get an additional standard deduction. The new tax bill adds to this already increased standard deduction, bringing the total to $23,750 for single individuals and up to $46,700 for married couples filing jointly (see Table). It’s worth noting that this new deduction is temporary – it’s available from 2025 to 2028. These potentially cumbersome standard deductions are subtracted from gross income to arrive at taxable income.

Effect of New Provision

The new provision does not expressly remove federal taxes from Social Security, but it has the same effect for many people, reducing taxable income by $6,000 for each person age 65+. For low-income retirees who rely on Social Security, this may be enough to all but eliminate their entire income tax liability. Note, however, that low-income families below certain limits were already exempt from Social Security taxes. For these households, additional deductions will reduce other taxable income.

Let’s look at how this can affect income taxes. Take an unmarried woman over the age of 65. Say you receive a taxable pension of $30,000, investment income of $10,000, and Social Security benefits of $24,000 (85 percent will be taxable). That puts him in the 12% federal tax bracket. Filing a new tax of $6,000 will effectively reduce his tax bill by $720.

Focus on Income

An important caveat to this new provision is that it is issued to single taxpayers with income over $75,000 and married filers with income over $150,000. Phaseout is $60 for each $1,000 over the limit. It is fully liquidated at $175,000 for single filers and $250,000 for joint filers.

Big returns in 2026

Although the new tax provision does not explicitly eliminate taxes on Social Security, it will reduce taxes on many filers age 65+. If you paid estimated taxes throughout the year or had taxes withheld from your income, you may end up getting a bigger refund (or owe less) in 2026.

Luke Delorme, CFP® is the Director of Financial Planning at Tableaux Wealth in Great Barrington, MA (www.tableauxwealth.com), is accessible at luke@tableauxwealth.com. To stay updated on the Squared Away blog, join our free mailing list.

This blog post is for informational and educational purposes only and should not be construed as financial advice. Consult a qualified professional for advice specific to your situation.