Contents

• Introduction
• Taxation of Social Security Benefits
• The Senior Deduction in P.L. 119-21
• Effect of the Senior Deduction on Taxation of Social Security Benefits
• Additional Considerations
• Coverage of Social Security Beneficiaries by the Senior Deduction
• The Senior Deduction for Seniors Who Do Not Receive Social Security Benefits
• Effects on the Social Security and Hospital Insurance Trust Funds

Introduction

Social Security provides monthly cash benefits to eligible retired or disabled workers and their family members and to the eligible family members of deceased workers. In May 2025, the Social Security system provided $129.4 billion in monthly benefits to 69.6 million retired or disabled workers and spouses, survivors, and dependents of insured workers.¹ Since 1984, a portion of Social Security benefits is subject to federal income tax, depending on the beneficiary's income and other factors.

This report highlights how taxation of benefits is impacted by the new senior deduction in Section 70103 of the recently enacted P.L. 119-21. While the new senior deduction has been discussed in the context of taxation of Social Security benefits, the calculation of taxable Social Security benefits remains unchanged in Section 86 of the Internal Revenue Code.² The main eligibility requirements for the senior deduction are that (1) the taxpayer be age 65 or older, (2) the taxpayer have a work-authorized Social Security number, and (3) if married, the taxpayer must file a joint return.

Taxation of Social Security Benefits

Taxation of Social Security benefits began with the Social Security Amendments of 1983. The rationale for taxing Social Security benefits included improving tax equity by treating Social Security benefits more like other forms of retirement income and other income designed to replace lost wages. Further, it provided revenue to strengthen the financial solvency of the Social Security trust funds.³

Under current law, the amount of Social Security benefits included in a taxpayer's income is calculated using a statutory formula. Up to 85% of Social Security benefits can be included in taxable income for recipients whose "provisional income" exceeds either of two statutory thresholds (based on filing status). Provisional income is adjusted gross income plus certain otherwise tax-exempt income (tax-exempt interest) plus certain income specifically excluded from federal income taxation (interest on certain U.S. savings bonds, employer-provided adoption benefits, foreign earned income or foreign housing, and income earned in Puerto Rico or American Samoa by bona fide residents) plus 50% of Social Security benefits.

Social Security beneficiaries whose provisional income is above one of two statutory thresholds may pay federal income taxes on a portion of their Social Security benefits.⁴

The first-tier thresholds, below which no Social Security benefits are taxable, are $25,000 of provisional income for taxpayers filing as single, head of household, or qualifying widow(er) and $32,000 of provisional income for married taxpayers filing joint returns. In the case of taxpayers who are married filing separately, the threshold is also $25,000 of provisional income if the spouses lived apart all year, but it is $0 for those who lived together at any point during the tax year.

If provisional income is between the first-tier thresholds and the second-tier thresholds of $34,000 (for single filers) or $44,000 (for married couples filing jointly), the amount of Social Security benefits subject to tax is the lesser of (1) 50% of Social Security benefits or (2) 50% of provisional income in excess of the first threshold.

If provisional income is above the second-tier thresholds, the amount of Social Security benefits subject to tax is the lesser of (1) 85% of benefits or (2) 85% of provisional income above the second threshold plus the smaller of (a) $4,500 (for single filers) or $6,000 (for married filers) or (b) 50% of benefits.

Because the threshold for married taxpayers filing separately who have lived together any time during the tax year is $0, the taxable benefits in such a case are the lesser of 85% of Social Security benefits or 85% of provisional income. None of the thresholds is indexed for inflation or wage growth.

The calculation of income tax due happens separately from the amount of Social Security benefits included in total income. The income tax due depends on the rest of the taxpayer's tax situation, especially on the total of any deductions the taxpayer is eligible for (including standard or itemized deductions and other deductions available only in certain situations, such as for qualified business income, educator expenses, or student loan interest paid).⁵ Therefore, some taxpayers may have taxable Social Security benefits included in income but not pay income tax on those benefits. Table 1 illustrates how taxable benefits are determined for three examples of single taxpayers and two examples of married couples filing joint returns. The table uses an average benefit of $1,857.75 per month⁶ per beneficiary, and the maximum benefit is $5,108 per month for a beneficiary retiring at age 70 in 2025.⁷ The Census Bureau estimated that in 2023 persons 65 or older with retirement income received an average of $28,150 in payments reported as survivor, disability, or retirement benefits, and persons 65 or older with earnings received an average of $62,810 in earnings.⁸ The other income in both tables represents possible income from work, pensions, assets, or other sources. These tables calculate only the Social Security benefits that are includible in income under current law; they do not calculate tax liability or taxes paid on benefits.

The Senior Deduction in P.L. 119-21

Section 70103 of P.L. 119-21 (commonly referred to as the One Big Beautiful Bill Act) contains the provision of an additional deduction for taxpayers ages 65 and older (senior deduction). This new senior deduction is available to taxpayers regardless of whether they claim the standard deduction or itemize their deductions. Under P.L. 119-21, the senior deduction is available for tax years 2025-2028.

The amount of the new senior deduction is $6,000 per eligible individual and phases out by decreasing by 6% of the amount by which a taxpayer's modified adjusted gross income⁹ exceeds $75,000 ($150,000 for those married filing jointly, not adjusted for inflation). The senior deduction would be available to taxpayers only if they (and their spouses, if married filing jointly) have work-authorized Social Security numbers.¹⁰ As a deduction, it can be used to reduce taxable income by up to $6,000 per eligible individual until taxable income is zero (and no tax is due). The deduction is not a tax credit, so it by itself will not create a tax refund (i.e., any unused deduction is lost).

For taxpayers who claim the standard deduction, this new senior deduction is distinct from and in addition to the additional standard deduction already available for taxpayers who are seniors or blind.¹¹ In 2025, this preexisting additional standard deduction is $1,600 per qualifying individual for those married filing jointly for whom both spouses are blind or elderly and $2,000 for qualifying taxpayers who are unmarried and not surviving spouses.¹² Unlike the new senior deduction, this additional standard deduction is available only to taxpayers who claim the standard deduction (not to taxpayers who itemize their deductions).

Effect of the Senior Deduction on Taxation of Social Security Benefits

The senior deduction is separate from the determination of the amount of Social Security benefits included in total income.¹³ The senior deduction is located in Section 151 of the Internal Revenue Code, does not change the calculation of how much of an individual's or couple's Social Security benefits is taxable (i.e., included in total income), and is not limited to Social Security beneficiaries. The determination of taxable Social Security benefits is located in Section 86 of the Internal Revenue Code and was not changed by P.L. 119-21. Taxable benefits are not limited by age. The senior deduction is age based and applied after taxable Social Security benefits are calculated. Generally, the senior deduction will decrease the taxes paid on a given amount of taxable income, which may include taxable Social Security benefits.¹⁴

Table 2 and Table 3 provide simplified examples of calculations of the amounts of Social Security benefits that are included in income and then total taxable income assuming that only the standard and senior deductions are taken (i.e., no other deductions, exclusions, or credits). Table 2 continues the examples from the calculation of taxable benefits in Table 1 for persons filing as single and adds a working nonbeneficiary age 65 or older. Table 3 continues the examples for married taxpayers filing jointly from Table 1.

Single and married-filing-jointly taxpayers who have income only from Social Security would not pay tax on their benefits with or without the senior deduction.¹⁵

Additional Considerations

Coverage of Social Security Beneficiaries by the Senior Deduction

Not all Social Security beneficiaries are age 65 or older. Eligible retired workers and spouses collecting benefits on the basis of age may begin claiming benefits at age 62. Survivor and disability beneficiaries may claim benefits during childhood and working ages.¹⁶ Table 4 shows that approximately one in five beneficiaries in current pay status in December 2023 were under the age of 65.¹⁷

The Senior Deduction for Seniors Who Do Not Receive Social Security Benefits

The senior deduction in P.L. 119-21 is available to all taxpayers age 65 and older with work-authorized Social Security numbers. The taxpayer does not need to receive benefits from Social Security to qualify for it. The Census Bureau estimated that in 2023 about 17% of persons 65 or older with income did not receive Social Security benefits.¹⁸ The Social Security Administration estimated that as of June 30, 2025, about 87% of the population age 65 and over were receiving benefits.¹⁹

There are multiple potential reasons for not receiving Social Security benefits at age 65. For example, some taxpayers may choose to delay claiming benefits to increase their payment amounts.²⁰ Some may have worked in jobs that were not covered by Social Security, such as clergy or certain federal, state, and local government workers.²¹ Also, some workers may not have achieved insured status to be eligible for benefits, such as immigrants who entered the United States later in life or sporadic workers.²²

Effects on the Social Security and Hospital Insurance Trust Funds

The proceeds from taxing up to 50% of Social Security benefits for beneficiaries with provisional income between the first-tier and second-tier thresholds are credited to Social Security's two trust funds—the Old-Age and Survivors Insurance and Disability Insurance trust funds—on the basis of the source of the benefits taxed. Additional proceeds from taxing up to 85% of benefits for beneficiaries with provisional income above the second-tier thresholds are credited to Medicare's Hospital Insurance trust fund.²³ In 2024, the Social Security trust funds were credited with $55.1 billion from the taxation of Social Security benefits, or 3.9% of the trust funds' total income.²⁴ Also in 2024, income to the Medicare Hospital Insurance trust fund from the taxation of Social Security benefits was $39.8 billion, or 8.8% of the trust fund's total income.²⁵

By increasing deductions, the senior deduction may lead to less taxable income and therefore result in less money credited to the Social Security trust funds. The Department of the Treasury's Office of Tax Analysis uses its Individual Income Tax Model (ITM) to estimate the amount of tax liability attributable to the taxation of benefits. It explains

The ITM uses the tax and information return data and extrapolations to estimate the amount of Social Security and Railroad Social Security Equivalent benefits included in AGI [adjusted gross income] and the Federal income tax liability attributable to the inclusion of those benefits for all of the filing units in the model. To do this, each tax unit's liability is estimated with and without the inclusion of benefits received by that tax unit. The difference between those two levels of income tax liability equals the tax liability attributable to the inclusion of benefits. The ITM results are used to calculate both the percentage of total benefits included in AGI and the average effective marginal tax rates applicable to the taxable benefits. Final estimates of tax liability attributable to the partial inclusion of benefits are produced using a spreadsheet-based model. This model blends the estimates of the percent of benefits in AGI and the average effective marginal tax rates with more recent tax return information (not available when the ITM is extrapolated) and the most current tax collection information.²⁶

Intuitively, consider beneficiaries with taxable benefits who would have paid tax without the senior deduction but who no longer will under the new senior deduction. Because they no longer have a tax liability, none of it can be attributed to taxable Social Security in the ITM using the current methodology. Similarly, the increased senior deduction may result in taxpayers being in lower tax brackets and paying lower marginal tax rates. Both of these situations would likely lower the tax on benefits going to the trust funds under the current ITM methodology.

There may also be higher-order effects on beneficiaries' decisions to work that are indeterminate in how they could impact the trust funds. For example, beneficiaries may choose to work (or work more) because they may pay less in income tax on their earnings due to the deduction. As a result, such workers would contribute more to the trust funds through payroll taxes. Alternatively, beneficiaries could choose not to work (or work less) because the deduction has allowed them to keep more of their income. If so, they would pay less in payroll taxes, lowering revenues for the trust funds.

Footnotes