Strategies for Optimizing Social Security Benefits Following the Enactment of the One Big Beautiful Bill
The One Big Beautiful Bill (OBBB) has recently been signed into law, introducing significant changes to the taxation of Social Security benefits for seniors. One of the key provisions of the bill is the addition of a new $6,000 deduction for individuals aged 65 and older (and $12,000 for qualified couples), effective from 2025 through 2028 [4].
This deduction aims to help seniors reduce or eliminate taxes on their Social Security benefits, with nearly 90 percent of seniors expected to no longer pay federal income taxes on their Social Security income as a result of this provision [2]. However, while the bill aims to provide tax relief for seniors, it has a negative financial impact on Social Security trust funds.
Because some of Social Security’s funding comes from the taxation of benefits, reducing taxable Social Security income reduces revenue flowing into the Social Security trust funds. This reduction in revenue accelerates the projected depletion timeline of the trust funds and increases program costs by an estimated $168.6 billion over the next decade [1].
In terms of personal financial planning, the best time to claim Social Security benefits depends on a client’s financial situation. If there is good health and a family history of longevity, it is advisable to consider other resources to initially fund retirement and let the lower-income-earning spouse take benefits earlier, while the higher-income earner holds off until 67 or later. This strategy can increase the annual combined benefit for the years both spouses are living.
Moreover, for clients at risk of being phased out of the OBBB deduction, options to lower taxable sources of income are being considered, such as leaning on taxable investment accounts rather than tax-deferred accounts. Retirees should also apply tax-planning strategies and consider which assets should be drawn upon for retirement income, especially when it comes to taxable income and the possibility of phasing out of the extra $6,000 deduction.
For those who may be retiring earlier than expected due to health issues, job termination, or caregiving responsibilities, a broader look at the timing of when to file for benefits is necessary. Benefits continue to increase at an 8% annual premium when claimed at age 70.
It is important to note that the full benefits for individuals born between 1955 and 1959 are realized at ages 66 plus two months, 66 years and two months for those born in 1955, and 66 years and 10 months for those born in 1959. Clients are encouraged to create an account on the Social Security Administration website and review benefit schedules before applying for Social Security benefits.
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In conclusion, while the OBBB provides immediate tax relief for seniors through an additional deduction, this comes at the cost of reducing the financial inflows to Social Security’s funding system, which may exacerbate longer-term solvency challenges. Clients are encouraged to review their financial plans in light of these changes and consult with a financial advisor to determine the best course of action for their individual circumstances.
- The OBBB, while offering a $6,000 deduction to help seniors reduce taxes on their Social Security benefits, might lead to a negative impact on Social Security trust funds, as it could reduce revenue flowing into them due to a decrease in taxable Social Security income.
- For retirees, particularly those at risk of being phased out of the OBBB deduction, it's essential to consider tax-planning strategies such as managing taxable sources of income and drawing upon taxable income strategically to ensure they maximize the benefits they can receive from their personal finances and Social Security.
