In a celebratory email sent to Americans across the country, the Social Security Administration applauded the passage of the “One, Big, Beautiful Bill, a landmark piece of legislation that delivers long-awaited tax relief to millions of older Americans.” The email went on to say, “The bill ensures that nearly 90% of Social Security beneficiaries will no longer pay federal income taxes on their benefits, providing meaningful and immediate relief to seniors who have spent a lifetime contributing to our nation’s economy.”
Those who recall Trump’s campaign promise to eliminate taxes on Social Security benefits might have interpreted the email as confirmation that the budget bill recently signed into law would do just that. In fact, a New York Times article said as much.
To be clear, the new law does not do away with the formula that determines if up to 85% of Social Security income will be taxable. Rather, it offers a new tax deduction of up to $6,000 for taxpayers 65 and older. This new deduction may have the effect of reducing taxes for people on Social Security, but it is not directly tied to their Social Security income. It will have no effect on people under 65 even if they are receiving Social Security. Conversely, people 65 and older may get the deduction even if they have not yet started Social Security. And not everyone age 65 or older will get the deduction anyway. It phases out at income of $75,000 for single individuals or $150,000 for joint filers and is completely eliminated if income is above $175,000 (single) or $250,000 (joint). Plus, it’s available only for years 2025–2028.
As it turns out, this is better for the trust fund. Eliminating taxes on benefits would deprive the OASDI Trust Fund of about $55 billion in income per year (about 4–5% of total revenue), which would marginally accelerate its exhaust date. The new deduction will also result in less income taxes going into the trust fund because it will lower some Social Security recipients’ income. But that will cause a smaller hit to the trust fund—about $30 billion annually—compared to eliminating income taxes on benefits entirely, according to the Committee for a Responsible Federal Budget. If Congress wants to spare seniors taxes on their Social Security benefits it would make sense to do it in separate legislation that would also contain revenue-raising provisions such as raising the FICA tax rate or lifting the tax cap. In the meantime, clients who are able to take the deduction can enjoy it while it lasts. They just need to be aware that the income tax on Social Security benefits has not gone away, and they should not be surprised to see it on the 2025 tax return they file next year.
HSA contributions for people on Medicare still not allowed
Earlier versions of the bill would have allowed HSA contributions for people enrolled in Medicare Part A. However, the final version that made its way to Trump’s desk stripped out that provision. Anyone enrolled in any part of Medicare will still not be able to contribute to an HSA.