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The recently enacted One Big Beautiful Bill Act included a number of tax provisions of interest to HumbleDollar readers. Given the emphasis on retirement planning on HumbleDollar, the new bonus Deduction for Seniors has potential to provide a significant tax savings for seniors.
This has been discussed in previous posts over the last few weeks, but the details are worth a quick review. Taxpayers who reach 65 by the last day of the tax year, starting in 2025, are eligible for a bonus $6,000 per taxpayer deduction. This bonus deduction is in addition to the existing additional deduction for seniors. For 2025 for single filers, the base standard deduction is $15,750 and the existing senior deduction is $2,000. With the bonus, a single filer (SF) 65 and over has a combined deduction of $23,750. For married couples filing jointly (MFJ), the base is $31,500, and the existing senior deduction is $1,600 per person. With the bonus, a MFJ filer 65 and over has a combined deduction of $46,700.
Per the IRS website there are a few important caveats. There are phaseouts for taxpayers filing single with modified adjusted gross income (MAGI) over $75,000, or $150,000 for married couples filing jointly. The phaseout is 6% of every dollar over the threshold. Additionally, the site indicates that married couples must file jointly to be eligible for the bonus deduction. The deduction is only in effect for the years 2025 through 2028.
I thought it would be interesting to see the impact of new deduction on a few different cases. I focused on the maximum income allowed before the phaseout begins, assuming this would show the maximum benefit. I also looked at a mix of income types, including IRA withdrawals, pensions, long term capital gains (LTCG) and social security (SS) benefits. I used AARP’s income tax calculator to generate the results. Unfortunately, the tool has not been updated to reflect the latest tax law changes, so I had to massage the inputs to simulate the newer deductions.
The results are shown in the table below. To be honest, the analysis didn’t produce any financial epiphanies. One of the misperceptions I have seen is that this deduction is only for people who currently receive SS benefits. This is incorrect. As long as a taxpayer meets the criteria, they will receive a tax benefit. The benefit also depends on the makeup of the income stream. It seems likely that a single filer near the phaseout limit will see a tax savings of about a $1,000; married couples will see twice that. One interesting result – the additional deduction seems to keep one’s taxable income below the threshold for the LTCG 15% bracket.
For retirees with fixed income sources – annuities, pensions, and SS, there aren’t as many opportunities for tax efficiencies. Retirees who generate their income from a mix of SS and savings, both pre and post-tax, have choices that can impact a number of tax-related items, including IRMAA. The new deduction provides a potential tax savings, at the cost of a bit more complexity. For those 65 and over still working, it provides additional incentive to keep their MAGI below the phaseout limits. This could take the form of choosing to save in a traditional 401k, as opposed to a Roth 401k.
| Item | SF | SF | SF | MFJ | MFJ | MFJ |
| IRA Withdrawal | $50,000 | $25,000 | $25,000 | $100,000 | $50,000 | $50,000 |
| Pension | $25,000 | $25,000 | $25,000 | $50,000 | $50,000 | $50,000 |
| LTCG | $0 | $25,000 | $0 | $0 | $50,000 | $0 |
| SS Benefits | $0 | $0 | $25,000 | $0 | $0 | $50,000 |
| Total Income | $75,000 | $75,000 | $75,000 | $150,000 | $150,000 | $150,000 |
| Taxable SS | $0 | $0 | $21,250 | $0 | $0 | $42,500 |
| AGI | $75,000 | $75,000 | $71,250 | $150,000 | $150,000 | $142,500 |
| Standard Ded | $17,750 | $17,750 | $17,750 | $34,700 | $34,700 | $34,700 |
| Taxable Income | $57,250 | $57,250 | $53,500 | $115,300 | $115,300 | $107,800 |
| Tax | $7,515 | $4,970 | $6,690 | $15,194 | $10,152 | $13,554 |
| New 65 + Ded | $6,000 | $6,000 | $6,000 | $12,000 | $12,000 | $12,000 |
| New Std Ded | $23,750 | $23,750 | $23,750 | $46,700 | $46,700 | $46,700 |
| New Tax Income | $51,250 | $51,250 | $47,500 | $103,300 | $103,300 | $95,800 |
| New Tax | $6,195 | $3,350 | $5,465 | $12,554 | $6,912 | $11,022 |
| Tax Savings | $1,320 | $1,620 | $1,225 | $2,640 | $3,240 | $2,532 |
| Tax Bracket | 22% | 22% | 12% | 22% | 22% | 12% |
| Tax on SS | $0 | $0 | $2,550 | $0 | $0 | $5,100 |
| Eff Tax | 12.1% | 6.5% | 11.5% | 12.2% | 6.7% | 11.5% |
| Eff Marginal Tax Rate | 22% | 27% | 20.4% | 22% | 27% | 21.1% |
Rick, how did you get that 20.4% marginal rate? See my comment below.
Randy, thanks for reading. I’m copying your comment from below for completeness.
Rick, how do you get 20.4%? 12%x1.85=22.2%
The Eff Marginal Tax Rate in the last row was an attempt to show the impact of the entire $6,000 deduction. In the case you reference, the taxable income with the bonus deduction was just below the limit for the 12% bracket. If you remove the $6,000 deduction, the taxable income is about $5,025 above the minimum for the 22% bracket. So the 20.4% is the weighted average of the amount of the bonus deduction in each bracket.
The calculation is:
($975 / $6,000)*0.12 + ($5,025 / $6,000)*0.22 = 0.02038 (or 20.38%)
or $1,225 / $6,000 =0.204 (20.4%)
This case is also interesting because it shows how the new bonus deduction does not impact the taxability of your SS benefits. With and without the bonus deduction, 85% of the SS benefits are taxable. The bonus deduction reduces the taxable income – in this case below the 22% tax bracket threshold. Because the taxable SS is above the maximum value (85%) the standard marginal rate (defined as the rate on the next $1 of income) is the tax bracket, which is 12% with the deduction, or 22% without the bonus deduction.
I hope this helps, and sorry for the confusion.
FYI:
Here are the links to the “Tax Tables” spreadsheet [in .ods / .xlsx / .pdf / Google Sheets formats) that my Financial Workbook Yearly Financial spreadsheets access to calculate my Federal and CA State income taxes.
Note that the formulas (that each Yearly Financial Spreadsheet uses to reference its proper pair of Federal & State tables: Fed-MFJ/State-MFJ or Fed-S/State-S) are shown as comments under their respective tables.
Note that the formulas shown are in Open Office 4.1.15 Spreadsheet format, and the corresponding MS Excel formulas will have a slightly different format (possibly as simple as replacing all “;” with “,”).
I believe that The Federal Tax information shown is accurate for the 2025 tax year (including a few pieces of data that are specific to the new Federal Tax Law that was just passed), and the CA State Tax information shown is accurate for the 2024 Tax year.
Here are the links to the publicly accessible files:
https://drive.google.com/file/d/1563pQ83bLhSiF2rQmA-xij76za2bqSwi/view?usp=drive_link
https://docs.google.com/spreadsheets/d/1SYuGXpRyiKvmuwO91BNIFl1nbn9TicmE-zxKFNYEVPY/edit?usp=drive_link
https://drive.google.com/file/d/1opNkpA16sTMkLONQH3WdQeoNGeML30vG/view?usp=drive_link
https://docs.google.com/spreadsheets/d/1A0-kL2uz-BGHXWQLG-k5VaB6ZPZcSwwG/edit?usp=drive_link&ouid=106120381258351185880&rtpof=true&sd=true
Feel free to use the files as you deem fit.
Here’s something that you might find interesting.
I’m one of those people who maintains a workbook of spreadsheets that includes:
(1) current Federal and CA State Marginal Income Tax Tables (including personal exemptions, >age 65 deduction, etc.). I update the information yearly to reflect the current tax bracket values, etc., which I have already done to reflect the changes included in the 2025 Federal tax law that was just passed.
(2) a yearly Financial spreadsheet for each year from 2011-2045. Interestingly, I had to also modify the Federal income tax calculations that each yearly spreadsheet performs for the (temporary) new tax law changes for the years 2025-2029.
(3) a yearly Expense spreadsheet (which I add to the workbook on January 1st of each new year) that tracks all of our expenses for the year. I copy the prior year Expense sheet because things/expenses don’t change much from one year to the next.
I kept the PDF file (printout) of the prior spreadsheet workbook BEFORE I updated the spreadsheets in the workbook to reflect the new 2025 Federal tax law changes, so I’m able to see EXACTLY the difference in the FIT taxes I will pay over the next 5 years due to the new law (using the 2025 FIT Marginal Income Tax Tables for all future years, married filing jointly, both are seniors over the age of 65):
Diff
2025: -38%
2026: -25%
2027: -25%
2028: -24%
2029: -02%
2030: -03%
Note:
——-
I use Turbo Tax to calculate and submit my FIT & SIT and my spreadsheet tax calculations match the Turbo Tax calculations.
You are the man! You need to post more about this. What does your yearly financial spreadsheet contain? Is it a year-by-year projection? I have a spreadsheet which predicts my FIT and SIT throughout the year. It came in handy when I was doing a bunch of 1099 consulting and needed to file estimated taxes. I still keep it going as the last few years have had some variations due to buying and selling a few houses and putting a vacation home into use as a part-time rental. My SS matches TurboTax pretty well, but there are always a few surprises.
I configured the 2 files I uploaded to Google Docs to be available to the public:
2028 Financial Spreadsheet.ods
2028 Financial Spreadsheet.pdf
Sharing these items and the work they represent is so very generous of you. At first, the links did not work. Now they do. Thank you.
Rick:
Q1: What does your yearly financial spreadsheet contain?
A1: Everything I think is important to know and track.
Q2: Is it a year-by-year projection?
A2: Yes, with each yearly spreadsheet referencing key data from the prior year’s values.
I also keep a set of spreadsheets at the beginning of the workbook that all yearly financial spreadsheets reference.
The tab names of the common spreadsheets are:
-Formulas
-Tax Tables
-Loan Schedule
-MG Amortization Table
-Newall Amortization Table
-Shared Equity
-2nd House
I will attempt to copy my redacted (blanked-out numbers) 2028 spreadsheet into a separate reply so you’ll have a better picture of it. If that doesn’t work I will upload it to Google Docs and post the link.
Dave Rhoades
Rick:
Try these links:
https://drive.google.com/file/d/1CGcc6rZx00Ig702qWKHCGNnKEz2EBgaG/view?usp=drive_link
https://drive.google.com/file/d/1Ewzt7THZrG6Mkp7X2pTiTlIJteruHhUk/view?usp=drive_link
Dave Rhoades
Dave, Got it. Thanks. Very impressive work.
Good, and thank you for all of your great contributions to HD over the years.
My Financial Spreadsheets workbook has continuously evolved since I created it in 2010.
David, you are very welcome.
Consciences are pesky things, aren’t they.
Yes they are David. Thanks for reading and commenting.
Thanks Rick for all that info. I am confident it will give a nice picture for most of the changes affecting many.
William, thanks for reading and commenting. New tax laws are always confusing and I aim to try to make them a bit more understandable.
If I were a young person, I would REALLY be angry about the new tax reductions for older, wealthier citizens at the expense of stealing from my future by increasing the federal budget deficit and hence the national debt.
But the Republicans are smart, they know that the age group with the highest percentage of voter are…., guess which, oh but of course, its the SENIORS!
And here’s another aspect of the new tax reduction for senior citizens: they will all expire at the end of the current Presidents term.
Implied: “Hey Seniors: if you want to continue to receive these special tax breaks that are just for you, then you need to keep (or start) voting for Republican candidates!
Oh, but never mind that we are gutting Medicaid.
David, thanks for reading and commenting. It’s hard to understand the reasoning behind the new bonus deduction. Some of the discussion seems to be centered on the idea of eliminating taxes on SS. From my research it is not directly connected to people receiving SS, but it may help some folks receiving SS on the lower end of the income range. But in no way does it help SS solvency issue.
David, you and I could sit down and have a very agreeable conversation about such things. Sadly, it would not solve anything. The best thing we can do is to help our young people plan for and make the best of the situation. What occupations are best for the future? What financial tools are there for young families? What are the strategies young workers can employ to chart the course to a successful retirement? In my opinion, this is what HumbleDollar is all about.
Rick, it would appear that tax preparers have no need to fear extinction. Thanks for this excellent analysis.
Thanks Dan. It will be interesting to see how this is implemented in IRS forms and tax software. The people in that industry also have job security
I’m sure it will be a mad scramble for the programmers at the IRS come January, especially with a reduced workforce.
I found the another nuance of the new bonus senior deduction. This is from an article on AARP’s website. The new bonus deduction is available if you itemize or use the standard deduction.
What if I’m itemizing?You can claim the new deduction regardless of whether you itemize your taxes or claim the standard deduction.
If you itemize, you stack the new deduction on top of your itemized deductions. Let’s say you’re single, 65 years old, eligible for the full $6,000 deduction and have $40,000 of itemized deductions. If you have no other deductions, you can lower your taxable income by a total of $46,000.
Thanks for this. It is great news for those of us in CCRCs who can itemize thanks to the hefty medical deduction.
Thanks. I was thinking this would have helped my mother-in-law who had extensive medical costs due to dementia. We used those deductions to reduce her IRA over a number if years.
Great addition. This wouldn’t have occurred to me.
Thanks Doug. I did not notice this during a first reading of the IRS site.
Rick, the average social security benefit for retired beneficiaries is $2,005.05 per month. Using your calculations and assuming 50% of the benefit is taxable now, what is the potential net gain under the new law.
Without any capital gains to muck up the picture, and with the taxable income low enough to stay within the 12% bracket with and without the bonus deduction, the tax savings is simply $6,000 x 0.12 =$720.00. I had to back into this a bit since the AARP calculator isn’t fully updated with the changes. With a yearly SS benefit of $24,060, you would need about $30,850 of other income (say pension + IRA withdrawals) to result in 50% of the SS benefits being taxable income. Before the bonus deduction the taxable income would be $25,106. The bonus reduces the taxable income by $6,000 to $19,106. The bonus deduction does not impact the amount of SS benefits subject to taxation – that is based on the amount of provisional income.
I had started generating a table similar to the one above, but focusing on the lower end of the income scale. So far it appears that the savings for simple tax returns – SS and modest other ordinary income – is simply the $6,000 times the marginal rate.
Rick thanks for doing the tables. As this year I got married I was already in a better tax situation (!) and my taxes were going to be much lower. With the additional senior deduction I will be able to take long term capital gains and have qualified dividends and pay zero taxes on them. It would seem to be an opportune time for others to see if they should be taking gains now at least for a step-up in basis.
James, thanks for reading and commenting. Congratulations on your marriage, and I’m glad it was tax-positive!
Rick, thanks for your work on this. And a question for you or Bill or anyone who knows. The 6% phaseout for every dollar over the threshold is applied per person in the case of MFJ—right?
If a MFJ couple has a $250,000 MAGI, that’s $100,000 over the threshold. So to totally eliminate the deduction, you figure $100,000 x .06 x 2 = $12,000. Is that correct?
Andrew, i believe you are correct. Please see my response to Rob below, and thanks again to Howard for addressing this confusing part of the new deduction.
Thanks, Rick (and thanks, Howard). I’ve read several articles with explanations of the phaseout, and not a one made this clear.
Impressive. However, there’s not much I can do about my income at this point, which means I will see some but much less than all of this deduction. My pension is fixed. My Social Security is fixed. My RMD is fixed. Reducing interest and dividend income would incur capital gains. But I didn’t ask for the deduction and would have preferred them to fix the Social Security system instead of tinkering and increasing the national debt.
Surely you are familiar with QCDs, which can reduce your RMD by over $100k/year.
Of course I am familiar with QCDs, but there is no way I am making large charitable gifts at this point in my retirement. I may need the money myself. I do make small ones.
I’m with you Kathy. It’s nothing but political theatrics with long term adverse consequences.
For sure. Enjoy your nice piece of cake for the time being, but don’t forget that a very strict diet will imposed in the not too distant future.
Such as?
Hi Kathy,
The OBBBA was passed under the Byrd rule where only a simple majority is required to pass a reconciliation bill in the Senate as I understand the rule. It seems unlikely that outside of the Byrd rule that there is the political will to get 60 votes in the Senate to currently do what is needed to fix the funding for social security to pay the projected scheduled benefits beyond 2032 or so.
As for your RMD being fixed have you considered a Qualified Longevity Annuity Contract (QLAC) which lowers your asset base the RMD is computed on until the QLAC becomes effective, which is required to start no later than age 85 as I understand the requirement?
I’ve heard of QLACs. Same problem with inflation I have with all annuities. Also, aren’t you just deferring taxes? I have thought of posting a question about them here but have been busy (yes, even in retirement, 😉 )
I often watch Friends Talk Money which covers a lot of topics mostly about money in retirement. A couple of years back the episode topic was annuities which I thought was worth the watch for me. Tax deferral is a major consideration in my comment but other considerations are lifetime income and mortality credits as part of the positives regarding annuities. I chose to not buy an annuity.
If you are interested in watching the video a link follows –
https://friendstalkmoney.org/podcast/annuities-for-retirement-income/
Best, Bill
Thanks Kathy. The fact that it was only enacted for 4 years may be telling.
And annoying. The tax code is way, way over-complicated already.
Notice that this senior bonus was carefully crafted as a ‘below-the-line’ deduction so as not to interfere with IRMAA collections.
I haven’t seen an actual implementation of the new deduction, but I assume it is “below-the-line”. A taxpayer who met the MAGI bonus deduction guidelines (below the phaseout) for 2025 would likely be below the first IRMAA bracket ($106K SF; $212K for MFJ in 2025). Even those at the top of the bonus deduction phaseout range would be in the 2025 1st IRMAA bracket. We will have to wait to 2027 to see how these interact.
Now all retirees have to do is hope their SS benefit isn’t reduced by 20+% in a few years or the next administration isn’t forced to raise taxes to keep paying the national debt.
I can just see the next campaign. “So and so is going to raise your taxes by letting the senior deduction expire. 🤑”
There should not be any joy over this. We are taking from our children and grandchildren’s futures.
Dick, thanks for reading and commenting.
My initial plan is to utilize the gift of the senior bonus to convert another 12K per year from my wife’s traditional to a Roth IRA for the next four years before we claim Social Security at 70. This will allow us to covert 48K more while still staying in the 12% maximum tax bracket.
I read a recent article about how sometimes due to compounding you are always chasing an increasing balance (due to compounding) of the existing assets trying to empty the traditional account. Surely a first world problem.
David, thanks for reading and commenting. Your conversion plan sounds solid.
I agree that much of what is discussed in HD falls into the first world category. I try to look at these topics from the ones of someone in the middle to lower economic status, where a bit of optimization can make a big difference in their standard of living.
Thank you, Rick. I did a quick calculation of our scenario and my results were in line with yours for Spouse and me. I appreciate you taking the time to do the research for us. Chris
Chris, thanks for reading and commenting. There has been confusion about how, or whether, SS would be taxed, and how this new deduction would be implemented. In the end it appears fairly straightforward, but it will be interesting to see how the IRS implements the changes in the official forms.
The single person phaseout range for the senior bonus is 75K-175K. If this was equivalent for a married couple the phase range would be 75K-350K. However the enacted law has a phaseout range of 75K-250K for married couples.
Rob, thanks for reading and commenting. There is confusion around the phaseout portion of the new deduction. Luckily, Howard Rohleder provided a great summary of the phaseout rule in a comment to Adam Grossman’s review of the Bill. I’m posting the text of Howard’s comment below – many thanks to Howard for a great explanation.
A note of caution if you are calculating the phase out of the bonus standard deduction for taxpayers over age 65. The phase out for couples filing jointly is from $150,000 to $250,000 modified adjusted gross income. Many articles I have seen say to reduce the $12,000 bonus by 6% of the amount your income exceeds $150,000. Note that that is 6% per person. For an income of $175,000, the excess is $25000. 6% of $25,000 is $1500. For a couple with this income, the bonus deduction is reduced by $3000 ($1500 x 2) for a deduction of $9000. I was initially confused by this and others may be as well.
MAGI ($) | Deduction Remaining ($)
—————-|————————-
150,000 | 12,000
175,000 | 9,000
200,000 | 6,000
225,000 | 3,000
250,000 | 0
Thanks for clarifying that it’s 6% per person and providing the example. Appreciate all the work in your article!
Cheryl. You are welcome but Howard deserves the credit.
Great analysis Rick and a lot of work on your part. Bravo.
I would highlight two matters in your commentary which I think deserves particular emphasis.
First, you correctly note one criteria for the extra 6K senior bonus per spouse 2025 personal deduction with the short comment –
Additionally, the site indicates that married couples must file jointly to be eligible for the bonus deduction.
If a 65+ x 2 couple’s marriage is on the rocks (or other reasons) and they cannot agree to file a joint return they would end up filing married filing separately and could each be giving up their $6K senior deduction. Ouch.
Second, in your fifth column example, MFJ with $50K of long term capital gains, the tax changes $3,240 with the additional two senior deductions totaling $12,000.
3,240 / 12,000 = 27%.
This demonstrates in calculating taxes that the long term capital gains rate brackets stack on top of the ordinary income rates. Ordinary income dropped $12K x 12% = $1,440 in tax savings. The long term capital capital gains did not change but the capital gain bracket they fall in moved from the 15% bracket to the 0% bracket and saved $12K x 15% = $1,800. Thus the total tax savings is $1,440 + $1,800 = $3,240 as shown in your analysis.
The 27% change is the marginal tax rate. Your analysis shows the value of a formal analysis and I hope your work encourages the readers of your article to make such an analysis so they may make good tax decisions.
Thank you Rick.
Bill, thanks for the kind words and added analysis. On the spreadsheet I used for this I calculate the effective marginal rate for each case. I left it out of the table because it felt like it was getting long and complicated. Your clear, simple explanation is far better than anything i would have written. I’ve found that the method by which CG are taxed – the stacking – is confusing to many people. For the record, the effective margin rates are: 22%, 27%, and 20.4%. The last one is a result of 85% of the SS benefit being taxable.
Rick, how do you get 20.4%? 12%x1.85=22.2%
Randy – I responded to your comment above.
Thank you, Bill, for this added information on capital gains. Chris
Nice analysis, Rick. Thanks for putting it all in a nifty table.
Maybe you’ve also been thinking about the implications of “Trump accounts” for family financial planning? I’ve been pondering the problem at odd moments, but have yet to put it down on paper.
Ed, thanks for the kind words. I’ve been on travel the last 3 weeks and been a bit negligent in reviewing the many tax changes, Like you, it is definitely a topic i’m interested in learning more about. I look forward to hearing your thoughts on this.
Thanks for the links! I’ll check them out.
Bill, thanks for the references. I look forward to reading them.