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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.