What The New Tax Law Means For Social Security Benefits
Are you wondering how the latest tax law might affect your retirement income? The Tax Simplification and Family Relief Act (H.R. 1) introduces new rules that could change how much of your Social Security benefits are taxed. For many retirees, this means potential tax savings. Here’s what you need to know before tax season—and before our upcoming Social Security webinar.
What changed?
First, it’s important to clarify: The tax law does not fully eliminate federal income taxes on Social Security benefits. Instead, the legislation provides a new “senior deduction” (sometimes informally called a “senior bonus”) for taxpayers age 65 and over.
Here’s how it works:
- Beginning in the 2025 tax year, eligible taxpayers age 65+ can claim an additional deduction of up to $6,000 per person.
- This deduction is available even if you itemize, not only for those taking the standard deduction.
- The deduction phases out gradually for higher-income taxpayers:
- For single filers, the phaseout begins above $75,000 of modified adjusted gross income (MAGI).
- For married filers, the threshold is $150,000 of MAGI.
- Above certain “cap” incomes ($175,000 for singles, $250,000 for married), the deduction phases out entirely.
This benefit is temporary: it’s currently set to expire after tax year 2028, unless Congress renews it.
One of the biggest impacts: nearly 90% of Social Security beneficiaries will no longer pay federal income taxes on their benefits under the new rules. That said, for those in higher income brackets, a portion of benefits may still be taxable.
Other Relevant Changes And Caveats
- The bill also permanently extends many of the Tax Cuts and Jobs Act (TCJA) provisions, such as lower tax brackets and a higher standard deduction, so taxpayers can count on those rules not reverting.
- Because Social Security is funded via a separate trust, the reconciliation rules prevented Congress from fully eliminating benefit taxation in this bill.
- Some news headlines have overstated the changes by saying the new law “eliminates” taxes for most recipients. However, technically the new law reduces how much tax most people will pay.
What Should I Do Next?
Estimate whether you qualify
If you're 65+ and your income is below the phaseout thresholds, the new deduction could reduce or eliminate your tax burden on Social Security benefits.
Run cash flow scenarios
Meet with our team to see how the new rules may impact your overall retirement income strategy.
Watch for legislative changes
Since this provision is temporary, Congress may extend, modify, or let it expire after 2028.
Coordinate with tax professionals
This interacts with other tax provisions (e.g. deductions, income sources). We suggest that you consult with your CPA or tax professional.
Disclosures:
Covenant Wealth Strategies, LLC and LPL Financial are not endorsed by or affiliated with the U.S. Centers for Medicare and Medicaid Services or any government agency.
Karen Ireland, MFS Investments, is not affiliated with or endorsed by LPL Financial and Covenant Wealth Strategies.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.