Taxing Social Security Benefits: What You Need to Know About the Latest Changes

No tax on Social Security…not exactly, but you may get some benefit.

While campaign trails are full of wishful thinking, “no tax on social security” is no different. The reconciliation bill will create a deduction in lieu of eliminating tax on Social Security benefits as changes to Social Security benefits are prohibited in reconciliation legislation.  The Social Security tax provision is an enhanced deduction for seniors age 65+ who will receive a deduction of $6K/year as an individual or $12K/year as a married couple, subject to income limits discussed below. Please consider careful planning if you are close to income phase-outs.

Why you may not get much benefit…you make too much money.

Those with income above $75K/year as an individual or $150K/year as a married couple will see a phase-out from this deduction. 

How long will this last for…at least the current political cycle.

The senior “bonus deduction” will be in place for tax years 2025 to 2028. While this is something that could be extended in future years, the new legislation is clear in the deduction being eligible for a limited period.

How will this impact taxability of social security…this part is nuanced.

As you may or may not realize, social security income has either 0% of the income taxed, 50% of the income taxed, or 85% of the income taxed depending on your provisional income. Provisional income is an IRS equation that includes gross income, tax free interest, and half of your social security income. Prior to the new legislation, 64% of seniors have exemptions or deductions exceeding taxable income from social security. With the new legislation, 88% of seniors will have exemptions or deductions exceeding taxable income from social security. 

How to use this deduction strategically…this part is nuanced too.

To make the best use of this deduction, taxpayers may need to lower taxable income in the applicable 2025-2028 tax years. Middle- and lower-income retirees will see the biggest benefits as the highest income taxpayers most likely will not be income eligible. The other part of the equation is those over 65 years old that have delayed taking social security.  These taxpayers may need to review kicking off social security sooner to take advantage of this deduction that is set to expire in tax year 2028.

We are happy to assist you in understanding these latest tax changes. Give us a call at 616-356-2002 or complete our contact form today.