'Big beautiful' Senate bill touts tax help for seniors on Social Security. How it would work

CNBC

9 hours ago

Some Americans ages 65 and over may be poised to see additional tax relief if Republicans' "big beautiful" bill becomes law.
Now that the Senate and House have both passed their versions of the tax and spending bill, it is up to both chambers to decide how large that new temporary deduction — called a senior "bonus" in the legislative text — will be.
Per the Senate bill, the deduction would amount to up to $6,000 per eligible taxpayer. Meanwhile, the House's One Big Beautiful Bill Act calls for $4,000 per eligible individual.
The new additional temporary deduction would be in effect from 2025 through 2028, according to the proposals.
More from Personal Finance:What the Senate Republican tax and spending bill means for your money'Big beautiful bill' mostly benefits the rich, while low earners would suffer, report finds Social Security cost-of-living adjustment may be 2.5% in 2026, estimates find
Eligible taxpayers would get the full deduction if their modified adjusted gross income is up to $75,000 if single or $150,000 if married and filing taxes jointly.
For incomes above those thresholds, the deduction would phase out at a 6% rate based on the Senate bill and a 4% rate based on the House bill.
It would be available to taxpayers regardless of whether they claim the standard deduction or itemize their returns.
Based on both bills, the deduction would fully phase out for single filers with $175,000 in income and joint filers with $250,000, according to the Tax Foundation.
Notably, while the White House says the legislative package "slashes taxes on Social Security," it does not end the taxation of Social Security benefits.
President Donald Trump touted plans to end the taxation of Social Security benefits on the campaign trail.
However, Republicans are pursuing their tax bill through reconciliation, and a Senate rule prohibits changes to Social Security in that process.
The two proposed changes — the senior "bonus" versus eliminating taxes on Social Security benefits — would have different effects based on beneficiaries' incomes.
Social Security benefits are taxed based on a unique formula known as combined income — the sum of adjusted gross income, nontaxable interest income and half of Social Security benefits.
Up to 50% of Social Security benefits are taxed for single filers with $25,000 to $34,000 in combined income, or joint filers with between $32,000 and $44,000. Up to 85% of benefits are taxed for individuals and couples above those respective thresholds.
Eliminating taxes on Social Security benefits would benefit people with higher incomes. Individuals with combined income below $25,000 — or couples with combined income below $32,000 — do not pay taxes on their benefit income and therefore would not benefit.
In contrast, the senior bonus in the "big beautiful" legislation targets taxpayers with modified adjusted gross incomes below $75,000 if they are single and $150,000 if married.
"It's better because it helps the people who need the help more," Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, recently told CNBC.com.
Lower-middle to middle-income taxpayers would benefit the most from the additional senior deduction, according to the Tax Foundation.
Taxes on Social Security benefits started with legislation enacted in 1983.
The purpose of the Social Security reforms passed then was to shore up a funding shortfall the program faced.
Today, Social Security similarly faces imminent funding woes. The trust fund used to help pay benefits to retired workers and their families — the Old-Age and Survivors Insurance, OASI, trust fund — can pay scheduled benefits until 2033, according to the latest projections from Social Security's trustees. At that point, just 77% of those benefits will be payable, unless Congress enacts a fix sooner.
The senior "bonus" in the Senate bill may reduce the number of seniors who pay taxes on their benefits, according to the Committee for a Responsible Federal Budget. For those who still owe taxes on benefits, it could help reduce the marginal rate at which those benefits are taxed, according to the non-partisan organization.
The expanded senior deduction, along with other changes in the "big beautiful" bill including the extension and expansion of the 2017 tax cuts, would cost approximately $30 billion per year, the CRFB estimates.
That would accelerate the depletion date for Social Security's OASI trust fund to late 2032 from early 2033, according to the estimate. The insolvency date for Medicare's Hospital Insurance trust fund, which is used to fund Part A, would also be accelerated from 2036 to 2030, according to the CRFB.