Trump's new law cuts both ways for Social Security beneficiaries

The Trump administration has claimed that the recently passed tax and spending bill "delivers on President Trump's promise of no tax on Social Security." Experts say it's not that simple.

The provision, part of the nearly 900-page One Big Beautiful Bill Act that was signed into law on July 4, creates a new tax deduction for seniors age 65 and up, offering $6,000 in deductions for single filers and $12,000 for married couples.

White House and Social Security Administration officials have framed the new deduction as an elimination of taxes on Social Security benefits — a campaign promise made by President Trump — but experts point out that the new deduction can be used by seniors on any income, not just Social Security benefits.

A tax benefit for whom?

A recent analysis by the White House's Council of Economic Advisers found that 88% of beneficiaries will not pay taxes on their payments under the measure. This is because their deductions will be greater than their taxable benefits.

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Due to current income and tax thresholds, financial advisers say benefits from the deduction will be felt mostly by middle-income seniors. 

For single filers, the deduction applies to those earning up to $75,000 annually, phasing out thereafter and disappearing entirely at $175,000. For married couples, these thresholds are $150,000 for the start of the phase-out and $250,000 for its complete disappearance.

The deduction will have no impact on roughly half of all beneficiaries, who already pay no taxes on their benefits, according to the Center on Budget and Policy Priorities. Tax-paying beneficiaries who fall under the deduction's income limits would also not see any benefit if they are younger than 65.

Despite its limitations, Social Security Commissioner Frank Bisignano was quick to celebrate the new deduction.

"This is a historic step forward for America's seniors," Bisignano said in a statement. "For nearly 90 years, Social Security has been a cornerstone of economic security for older Americans. By significantly reducing the tax burden on benefits, this legislation reaffirms President Trump's promise to protect Social Security and helps ensure that seniors can better enjoy the retirement they've earned."

Monica Dwyer, senior vice president at Harvest Financial Advisors in West Chester, Ohio, said that the deduction is "definitely not in line with Trump's campaign promise of no more taxes on Social Security."

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"The One Big Beautiful Bill gives most of its tax breaks to people who don't need it and is going to hurt us in the future in terms of our ability to take the benefits that we were promised and have paid into for most of our lives when we're at the age of being able to collect Social Security benefits," Dwyer said.

The new deduction, combined with an expansion of the 2017 tax cuts, will accelerate the insolvency of the Social Security Old-Age and Survivors (OASI) trust fund from early 2033 to late 2032, according to the nonprofit, nonpartisan Committee for a Responsible Federal Budget. Cuts to Social Security benefits will also be deeper than previously estimated, with the committee estimating a roughly 24% reduction in benefits in 2032.

"The ironic part is by virtue of reducing tax revenue — largely from Social Security benefits but not exclusively — this bill indirectly affects the funding of the program and exacerbates the shortfall," said Tyson Sprick, a financial advisor at Caliber Wealth Management in Overland Park, Kansas. "There are many ways to fix the issue, but Congress keeps kicking the can down the road, and we're running out of road."

Navigating income and tax implications

Numerous advisers said that many of their clients would see little, if any, benefit from the deduction due to their high income. However the new provision does present some potential benefits for clients who fall within or close to the outlined income limits.

"We have just begun having conversations with clients about the potential implications of this provision of the new bill," said Robert Ingram, a financial adviser at Center for Financial Planning, an RIA in Southfield, Michigan.

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The deduction, which is only in effect for tax years 2025 through 2028, could drive some retirees to temporarily reduce their income in an effort to take advantage of the deduction, Ingram said. Alternatively, some retirees may want to consider taking larger distributions while the deduction is still active to reduce their tax liability on capital gains.

That strategy could be especially beneficial for middle-income retirees, Sprick said.

"For those in the middle, I think it provides an opportunity to potentially have more room at attractive, low tax rates to realize capital gains — potentially at 0% — or to do Roth conversions," Sprick said. "This would apply regardless of whether you're currently receiving Social Security benefits."