Social Security Tax Relief: How the One Big Beautiful Bill Act Changes Your Retirement Income
The One Big Beautiful Bill Act has brought changes to how Social Security benefits are taxed, but despite headlines, the actual impact for most retirees is modest. While there is some relief available in the form of an “enhanced deduction” for older Americans, many people will see only a small reduction in their tax burden, if any.
The new rules can help some retirees keep more of their Social Security income, particularly those with moderate incomes and limited retirement distributions. However, for most taxpayers, the overall effect is incremental rather than transformative.
This post explains what’s changed, who it affects, and how to make the most of the new deduction.
How Social Security Was Taxed Before the Change
The old rules subjected a portion of Social Security benefits to federal income tax depending on your “combined income”—a calculation that often pulled middle-income retirees into the taxable range.
The Old Combined Income Formula
Your combined income included:
Adjusted gross income (AGI)
Nontaxable interest from municipal bonds
Half of your Social Security benefits
Previous Tax Thresholds
When your combined income exceeded specific levels, portions of your benefits became taxable:
For single filers:
Over $25,000: Up to 50% of benefits taxable
Over $34,000: Up to 85% of benefits taxable
For married couples filing jointly:
Over $32,000: Up to 50% of benefits taxable
Over $44,000: Up to 85% of benefits taxable
Because these thresholds were never adjusted for inflation, more retirees paid taxes on their benefits every year. By 2024, about 65% of recipients owed federal tax on some of their Social Security income.
The Enhanced Deduction: How Much Difference Does It Make?
The new law introduces an additional deduction for Americans age 65 and older. This deduction can reduce taxable income and may lower or eliminate taxes on Social Security benefits for those who qualify.
How Much You Can Deduct
$6,000 additional deduction for single filers age 65 and older
$12,000 additional deduction for married couples when both spouses are 65+
Income Phase-Out Limits
Single filers: Deduction begins to phase out above $75,000 AGI
Married filing jointly: Deduction begins to phase out above $150,000 AGI
For those with lower and moderate combined incomes, this deduction may be enough to keep their Social Security benefits tax-free or further reduce their overall tax owed. But if your income is already low enough that you didn’t pay taxes before, or high enough that the phase-out applies, the enhancement will have limited benefit.
Who Actually Benefits from the New Rules?
Lower-Income Retirees (Combined Income Under $25,000)
Most retirees in this group didn’t pay any federal tax on Social Security benefits under the old rules. The enhanced deduction might reduce what little tax is owed on other small sources of income, but its impact will likely be minor.
Example: Mary, age 67, gets $18,000 from Social Security and $8,000 from a small pension. She probably already paid no tax on her Social Security, so any further benefit is small.
Middle-Income Retirees (Combined Income $25,000–$60,000)
This group stands to gain the most, although even here, the new rule usually means paying a bit less tax rather than seeing it disappear entirely.
Example: Robert and Janet, both 68, receive $45,000 in Social Security and take $15,000 from a 401(k). The deduction may help reduce their taxable benefits somewhat or eliminate them altogether, depending on their exact numbers.
Higher-Income Retirees (Combined Income Over $75,000)
The deduction phases out for higher incomes, so retirees with significant retirement distributions or investment income usually receive little or no extra relief.
Myths About Social Security Tax Relief
Myth 1: "All Social Security Is Now Tax-Free for Everyone"
Reality: The enhanced deduction helps some people, but it doesn’t end Social Security taxation for all retirees. Many will still pay taxes, especially those with higher incomes.
Myth 2: "The Changes Are Permanent"
Reality: The enhanced deduction is scheduled to expire after 2028 unless Congress extends it. Planning based on this benefit should take its temporary nature into account.
Myth 3: "State Taxes Changed Too"
Reality: The law only affects federal taxation. States that already tax Social Security have their own rules.
Myth 4: "You Need to File Differently"
Reality: Nothing special is required. If you qualify, the deduction will be applied automatically by your tax software or preparer.
States That Still Tax Social Security Benefits
Federal relief has not ended Social Security taxation at the state level. Thirteen states continue to tax these benefits, and their rules have not changed:
Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
North Dakota
Rhode Island
Utah
Vermont
West Virginia
Modest Ways to Maximize the Enhanced Deduction
Stay Below the Phase-Out Thresholds
If your AGI is close to the cut-offs ($75,000 for singles, $150,000 for married), consider:
Drawing from Roth IRAs or other non-taxable sources to keep AGI down
Delaying or spreading out withdrawals from traditional IRAs and 401(k)s
Consider the Temporary Nature
Since the deduction is only available through 2028, adjusting withdrawal and income strategies in the short term may be helpful, but be careful not to over-prioritize tax moves for a relatively short window.
Social Security Claiming Decisions
If you haven’t started benefits yet, keep the deduction window in mind. However, base your claiming age mainly on your personal and family situation, life expectancy, and cash flow needs—tax changes play only a supporting role.
Impact on Required Minimum Distributions
The enhanced deduction may help offset the taxable income generated from required minimum distributions (RMDs) if you’re age 73 or older and subject to these withdrawals. However, the benefit depends on your total AGI and should be weighed against your broader retirement plan.
Healthcare and Medicare Considerations
A small reduction in taxable income may help you avoid higher Medicare premiums (IRMAA), but here too the effect tends to be modest.
Married Couples
Couples where both spouses are over 65 get double the deduction, but the phase-out thresholds apply to joint AGI, limiting the benefit for households with larger retirement account withdrawals.
Professional Tax Help
The new deduction reduces some retirees’ tax burden, but its complexity can be confusing. If you have multiple income sources, live in a state that taxes Social Security, or need guidance on distribution timing, a professional can help you judge the real-world benefit.
Bottom Line: Manage Your Expectations
While the One Big Beautiful Bill Act offers some added relief for retirees, it's far from a sweeping overhaul of Social Security taxation. Most people will see in their tax returns that the relief is noticeable but modest—helpful for some, negligible for others, and of no consequence to those already outside the taxable range.
For Further Reading
For authoritative information about Social Security taxation and the enhanced deduction, consult these official resources:
IRS Publication 915: Social Security and Equivalent Railroad Retirement Benefits – The comprehensive IRS guide to Social Security benefit taxation rules and calculations
Social Security Administration: Income Taxes and Your Social Security Benefit – Official SSA guidance on how federal taxes apply to your benefits
IRS: Tax Benefits for Older Americans – Overview of tax advantages available to seniors, including the enhanced deduction