I am already receiving questions concerning the passage of the One Big Beautiful Bill Act (OBBBA) and its impact on the taxability of Social Security. Depending on your income, up to 85% of your Social Security benefits can be subject to tax. That includes retirement and benefits from Social Security trust funds, like survivor and disability benefits, but not Supplemental Security Income (SSI). The OBBBA does NOT change this formula.
Under both prior law and the OBBBA, whether your Social Security benefits are taxable depends on your total income and marital status. Form SSA-1099, which Social Security recipients receive by January 31, shows your total benefits, but determining your taxable benefits requires putting pencil to paper. Generally, if Social Security benefits are your only income, your benefits are not taxable. Furthermore, you were likely not required to file a federal income tax return.
If you received Social Security benefits plus other taxable income, the answer to how much, if any, of your Social Security is taxable could be found in the worksheet in the Form 1040 instruction book. Most tax software packages do the math automatically. The maximum tax rate that applied to social security benefits was 85%.
I would like to clarify that the OBBBA does not alter the rules governing the taxation of Social Security benefits. Instead, the bill provides a temporary tax deduction of up to $6,000 for seniors aged 65 and older. The full amount of this new deduction is available to individuals with an adjusted gross income (AGI) of $75,000 or less and couples filing jointly with an AGI of $150,000 or less. If the AGI on a joint return is less than $150,000, each spouse can take the $6,000 deduction if both are 65 or older, totaling $12,000.
This is important! Social Security recipients under 65 are ineligible to claim the new tax deduction.
Many taxpayers have the option to begin receiving Social Security benefits before normal retirement age. However, there is a penalty in the form of a reduced monthly benefit payment and a total loss of benefits if they have earnings (such as wages or self-employment) that exceed a minimum amount. Now, with the potential loss of a valuable new deduction, taxpayers will have another factor to consider when deciding whether to start receiving Social Security benefits before full retirement age.
Here is a table showing the maximum deduction (without itemizing) seniors can take on their 2025 federal tax return.
You will notice that I used the word temporary above. Why? That is because this new deduction is set to expire at the end of 2028. A future Congress could extend it or make another law change affecting how Social Security benefits are included in taxable income.
The $6,000 deduction is phased out (reduced) for AGIs exceeding the limits of $75,000 for singles or $150,000 for couples filing jointly. The maximum $6,000 deduction will be reduced by $60 for every $1,000 of AGI that exceeds the above-mentioned threshold of $75,000 for individuals and $150,000 for couples. Individuals with income (AGI) over $175,000, or $250,000 for couples, will not be eligible for any amount of this new deduction.
Let me provide an example. For 2025, a single taxpayer has income consisting of $75,000 in net rental income and $40,000 in Social Security benefits. Because of having so much other income, 85% of the $40,000 Social Security benefit will be taxable ($40,000 x .85 = $34,000). Assuming no other income, the taxpayer’s AGI will be $109,000 ($75,000 + $34,000). That exceeds the maximum of $75,000 by $34,000. That means that the $6,000 deduction will be reduced by $60 x 34 = $2,040. That will allow for a deduction of $3,960 ($6,000 – $2,040) to further reduce taxable income.
This law change will not benefit low-income seniors who already pay no federal income tax because they earn too little. Ultimately, higher-income seniors (but under the upper limit) are likely to benefit the most from this change.
Critics express concern about this law change. The new senior deduction has implications for the federal fund that pays out Social Security benefits, which was already facing insolvency in the coming decade. Along with other changes to the program, the deduction could accelerate the depletion of the Social Security trust fund by about a year. I expect that Congress will need to raise the limit on wages subject to FICA (and the SE tax) to help cover the cost of this new deduction. This is my prediction – I have read nothing on any such proposal.
I hope this provides some clarity on the new legislation and its impact on taxing Social Security benefits.