Key Points
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The “big, beautiful bill” provides a deduction, but doesn’t eliminate the federal tax on Social Security.
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The amount you owe in federal taxes on Social Security depends on income.
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State taxes still apply to Social Security regardless of the federal tax rules.
On July 4, President Donald Trump signed the “big, beautiful bill” into law, marking his largest legislation to date. The law includes many provisions, including some that affect Social Security recipients.
One aspect that has received a lot of attention is the impact on Social Security taxes. Trump campaigned on eliminating federal taxes on Social Security benefits and has touted that this law does that, but that’s not quite accurate.
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The new rules don’t eliminate the federal tax on Social Security, but do offer a deduction to eligible individuals. Let’s take a look at how the new changes will work.
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How federal Social Security taxes work
The IRS uses your “combined income” to calculate your tax bill. This includes the following:
- Adjusted gross income (AGI): Your total income from all non-Social Security sources.
- Nontaxable interest: Interest income not subject to federal tax, such as from U.S. Treasury and municipal bonds.
- Half of your Social Security benefits: 50% of your total Social Security benefits for the current year.
Once the IRS calculates your combined income, it uses the following to determine how much of your benefits are eligible to be taxed:
| Income if Filing Single | Income if Married, Filing Jointly | Percentage of Social Security Benefits That Are Taxable |
|---|---|---|
| Less than $25,000 | Less than $32,000 | 0% |
| $25,000 to $34,000 | $32,000 to $44,000 | Up to 50% |
| More than $34,000 | More than $44,000 | Up to 85% |
Data source: IRS.
The federal tax process for Social Security can be confusing
The percentages in the above table aren’t how much your benefits are taxed, just how much is eligible to be taxed. The amount that’s eligible to be taxed is added to other income you have and then taxed at your normal income tax rate.
To see it in action, let’s assume you’re married and filing jointly, and the following are true:
- Your combined AGI is $40,000.
- You earned $1,000 in Treasury and municipal bond interest.
- Your Social Security benefits for the year add up to $20,000.
In this case, your combined income would be $51,000 ($40,000 + $1,000 + $10,000). This means up to 85% of your benefits for the year ($17,000) are eligible to be taxed and will be added to your other income to be taxed normally.
How does the new law affect federal Social Security taxes?
The law that Trump signed doesn’t eliminate the federal Social Security tax, but it does offer a temporary deduction for some people 65 and older.
From now until 2028, qualified people 65 and older will receive a $6,000 deduction ($12,000 for couples). To qualify for the full deduction, single filers must have a modified adjusted gross income (MAGI) below $75,000, and couples must have a MAGI below $150,000.
Single filers with a MAGI between $75,000 and $175,000 and couples with a MAGI between $150,000 and $250,000 are eligible for a reduced deduction. Anybody earning over those thresholds isn’t eligible.
Unlike other types of deductions, you can claim this one whether you take the standard deduction or itemize your deductions.
Who will benefit from the new deduction?
Most low-income individuals already don’t pay federal taxes on their Social Security benefits, so this new deduction doesn’t really affect them. High-income folks aren’t eligible for the deduction, so it doesn’t help them, either. Middle-income people stand to benefit.
It’s important to note that the federal tax rules on Social Security don’t affect state-level taxes on benefits. There are currently nine states that tax Social Security benefits, so if you’re living in one of those, make sure you’re aware of your state’s specific tax rules.
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