Part of the recently passed tax bill includes what the administration calls “Social Security not taxable.” The bill does not directly eliminate taxes on Social Security payments, but it does provide additional deductions for seniors under certain income limits. The provision could effectively reduce — or in some cases even eliminate — the federal taxes paid by people over 65.
First, it should be noted that this tax break exacerbates Social Security's fragile fiscal situation. Social Security actuaries estimate that the new tax rules will push the trust fund's depletion date by about six months — from the third quarter of 2034 to the first quarter.
Nonetheless, current beneficiaries will see the benefit of lower taxes. This blog post explores how the new deduction works and how it affects your federal income tax.
How the deduction works
To understand the mechanics of this new tax break, it helps to understand how the deduction works. Below is a simplified 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 typically includes employment income, most pensions, taxable investment income, and up to 85% of Social Security income. Your taxable share of Social Security is based on what's called “combined income,” which is equal to one-half of your Social Security benefit, plus non-taxable interest, plus all other taxable income. Once total income exceeds $44,000 for a married couple filing jointly, or $34,000 for a single filer, 85% of Social Security benefits are taxable. (At lower thresholds, people are taxed on up to 50% of their benefit income; below these thresholds, benefits are not taxed at all.)
After totaling your total income (including taxable Social Security), you need to subtract your deductions. You can choose to count individual items and itemize deductions, but most people do better with the standard deduction. People over 65 also get an additional standard deduction. The new tax bill increases the already increased standard deduction, bringing the total to $23,750 for singles and $46,700 for married couples filing jointly (see table). It’s worth noting that this new deduction is temporary – applying from 2025 to 2028. This potentially huge standard deduction is then subtracted from your gross income to arrive at your taxable income.
Impact of new regulations
The new rules don't explicitly eliminate the federal Social Security tax, but they do have the same effect for many people, reducing taxable income by $6,000 per person over age 65. For low-income retirees who rely on Social Security, this may be enough to eliminate their entire federal income tax burden. Note, however, that low-income households below a certain threshold are already exempt from paying Social Security taxes. For these households, the super deduction will reduce other taxable income.
Let’s look at how this might affect income taxes. Take, for example, a single woman over 65 years old. Assume she receives $30,000 in taxable pension, $10,000 in investment income, and $24,000 in Social Security benefits (85% of which is taxable). This puts her in the 12% federal tax bracket. Incorporating the new $6,000 tax provision will effectively reduce her federal tax bill by $720.
Focus on income
An important caveat with this new rule is that it will be phased out for single taxpayers making more than $75,000 and married taxpayers making more than $150,000. The phase-out amount is $60 for every $1,000 above the threshold. The fee is $175,000 for single filers and $250,000 for joint filers, a full phase-out.
Larger refunds in 2026
While the new tax rules don't explicitly eliminate the Social Security tax, it will reduce taxes for many filers over 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), reachable luke@tableauxwealth.com. To stay up to date on the Squared Away blog, join our free email list.
This blog post is for informational and educational purposes only and should not be construed as financial advice. Please consult a qualified professional for advice specific to your situation.
