The Social Security Administration issued a statement last week immediately following passage of President Donald Trump’s massive tax bill, uncharacteristically celebrating the partisan legislative accomplishment by telling Americans the new law includes a provision that eliminates federal income taxes on Social Security benefits for most beneficiaries.
The problem with the letter, according to a number of Social Security experts, is that the so-called One Big Beautiful Bill did not in fact eliminate taxes on Social Security benefits.
“The law provides for a new enhanced $6,000 tax deduction for middle- and lower-income taxpayers aged 65 and older,” Marcia Mantell, president of Mantell Retirement Consulting, told ThinkAdvisor on Monday. “That’s a great thing in itself, but it’s not the same thing as actually eliminating taxes on Social Security benefits. My sense is that they are conflating the two issues for political purposes.”
Martha Shedden, the president and co-founder at the National Association of Registered Social Security Analysts, agreed with Mantell’s assessment.
“It appears that the SSA’s messaging is mixing up two different taxation issues and making it sound like people aren’t going to pay taxes on Social Security benefits anymore,” Shedden said. “That isn’t true. What the bill did include is a new federal income tax deduction for older Americans with adjusted gross incomes below a certain level, with an expiration date of 2028.”
Both Mantell and Shedden said they found the SSA’s letter to be frustrating, suggesting it will likely cause even more confusion on a topic that already leaves the typical American taxpayer scratching their head.
“Yes, it’s true that you can do the mental math and think about the new $6,000 deduction as offsetting some or even all of the taxes a higher-income beneficiary may be paying on their benefit,” Mantell said. “But, I think it is harmful to tell people that taxes on Social Security are flat-out gone. They will still be on the next tax return you file, for example, and that could catch clients by surprise.”
Again, Shedden agreed.
“Regardless of anyone’s personal views on the tax law and whether or not it is disingenuous to say that Social Security taxes have been eliminated, advisors still need to be aware of how Social Security is taxed on a technical basis,” she said.
According to Mantell, who cited a recent analysis from the Center for a Responsible Federal Budget, the law will modestly advance the insolvency date for the trust funds used to pay retirement benefits.
"They estimate that the law will accelerate Social Security and Medicare insolvency from 2033 to 2032, but that's not something I'm super worried about at the moment, since it's really just a move from projected insolvency in early 2033 to projected insolvency in Q4 of 2032," Mantell said. "We've been talking about looming insolvency for 20 years or more, and this doesn't change that broader conversation in a meaningful way."
The New $6,000 Deduction
As Mantell and Shedden observed, the new $6,000 deduction for seniors is on top of the existing standard deductions for those aged 65 and over.
Income limits will apply, they noted, with phase-out starting at $75,000 in income for single filers and $150,000 for couples filing jointly and ending at $175,000 and $250,000, respectively. As noted, the bonus deduction will be available from 2025 through 2028.
“As I said, one could look at this and view it as a direct offset to Social Security taxes,” Mantell said. “Or, you could just as easily look at this as an offset to higher state and local income taxes — or another tax burden you owe. Overall, the deduction is a good thing for seniors, but frankly, from the advisor's perspective, it won’t apply to all clients.”
Shedden pointed out that some seniors who are over age 65 with low incomes may not even be collecting Social Security yet. Nonetheless, they would benefit from the new deduction.
“So again, it’s not really a fair characterization to say this bill eliminated Social Security taxes,” Shedden said.
Could (or Should) Congress Actually Cut the Tax?
Though it would take an even bigger legislative lift, Mantell observed, Congress could still eliminate Social Security taxes through a stand-alone bill. It would presumably require 60 votes in the Senate to pass, she explained, but it’s not outside of the realm of possibility to imagine that a small but significant number of Democrats could come on board.
“The proposal to cut taxes on Social Security benefits was part of the bill originally, but it was determined to violate the budget reconciliation rules,” Mantell said. “I don’t necessarily think it’s likely this will happen as a stand-alone thing, but it’s important to highlight what would happen to the trust fund if this came to pass.”
In short, Shedden and Mantell agreed, cutting taxes on Social Security would result in marginally higher benefits for many Americans while simultaneously weakening the trust fund reserves and pushing forward the insolvency date.
“It’s important for the population to understand this,” Shedden concluded. “Taxes on benefits represent about 4% to 5% of the total revenue going into the trust funds each year. People need to be aware that taxation of Social Security income is different from all other taxes paid. It doesn’t go into the general fund. It goes back into the Social Security trust funds.”
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