09/09/2025
How Does the Additional Senior Deduction Compare to No Tax on Social Security?
July 4, 20253 min read
By: Alex Durante
During the 2024 election campaign, President Trump promised that he would eliminate all income taxes on Social Security. The recently passed One Big Beautiful Bill Act (OBBBA) does not include this provision, but provides a new additional standard deduction for seniors. While both policies would increase the deficit and generate little economic growth relative to their costs, they have differing impacts on taxpayers depending on where their incomes reside in the income distribution.
The taxation of Social Security benefits is a somewhat recent phenomenon. It was introduced as part of the 1983 amendments to shore up the Social Security trust fund, which at the time was facing insolvency, much like today. Unlike other types of income, the revenues generated from the taxation of Social Security benefits are earmarked specifically for the Social Security and Medicare trust funds.
To determine how much tax is owed, households first must calculate their “combined income,” defined as their adjusted gross income (AGI), tax-exempt interest income, and half of their Social Security benefits. Single filers earning between $25,000 and $34,000 in combined income ($32,000 and $44,000 for joint filers) face taxation on half of those benefits. Above those thresholds, up to 85 percent of their benefits face taxation. Single and joint filers with less than $25,000 and $32,000 in combined income respectively do not face any taxation on their Social Security benefits.
Prior to the passage of the OBBBA, seniors were already eligible for an additional standard deduction. Seniors over the age of 65 may claim an additional standard deduction of $1,600 per qualifying individual if they are married or $2,000 if they are unmarried and not a surviving spouse. The OBBBA provides an additional, separate deduction for seniors of $6,000 per individual from 2025 through 2028, and also makes it available to itemizers. The deduction will phase out at a 6 percent rate when modified adjusted gross income exceeds $75,000 for single filers and $150,000 for joint filers. The deduction is fully phased out at $175,000 for single filers and $250,000 for joint filers.
The following table compares the distributional effects of the increased senior deduction in the OBBBA to an exclusion of Social Security benefits from taxable income under TCJA extension. The increased senior deduction increases after-tax incomes for the lower-middle- and middle-income quintiles the most. The bottom quintile only sees a small increase in their after-tax income, as the standard deduction already largely wipes out their tax liability.
Table 1. Distribution Effects of No Tax on Social Security Benefits and Increased Senior Deduction
Percent Change in After-Tax Market Income
2026, Conventional
Market Income Percentile No Tax on Social Security Benefits (with TCJA extension) Increased Senior Deduction in OBBBA
0% - 20.0% 0.0% 0.1%
20.0% - 40.0% 0.1% 0.9%
40.0% - 60.0% 0.4% 0.7%
60.0% - 80.0% 0.9% 0.3%
80.0% - 100% 0.6% Less than +0.05%
80.0% - 90.0% 1.0% 0.1%
90.0% - 95.0% 0.8% Less than +0.05%
95.0% - 99.0% 0.6% Less than +0.05%
99.0% - 100% 0.2% 0.0%
Total 0.6% 0.2%
Note: Market income includes adjusted gross income (AGI) plus 1) tax-exempt interest; 2) nontaxable Social Security income; 3) the employer share of payroll taxes; 4) imputed corporate tax liability; 5) employer-sponsored health insurance and other fringe benefits; and 6) taxpayers’ imputed contributions to defined-contribution pension plans. Market income levels are adjusted for the number of exemptions reported on each return to make tax units more comparable. After-tax income is market income less individual income tax, corporate income tax, payroll taxes, estate and gift tax, custom duties, and excise taxes. The 2026 income break points by percentile are: 20%–$17,735; 40%–$38,572; 60%–$73,905; 80%–$130,661; 90%–$188,849; 95%–$266,968; and 99%–$611,194. Tax units with negative market income and non-filers are excluded from the percentile groups but included in the totals.
Source: Tax Foundation General Equilibrium Model, June 2025
Exempting Social Security from income taxation would not change the after-tax income for the bottom quintile, as those taxpayers are already exempt from taxation on their Social Security benefits. The tax cut would be tilted more toward higher-income taxpayers than either of the proposed senior deductions: the top quintile would see its after-tax income increase by 0.6 percent, compared to a less than 0.05 percent increase under the expanded senior deduction in OBBBA.
Overall, the increased senior deduction with the phaseout delivers a larger tax cut to lower-middle- and middle-income taxpayers compared to the original campaign promise of exempting all Social Security benefits from income taxation and would not weaken the trust funds as much. But given the temporary nature of the policy, it would increase the deficit-impact of the reconciliation bill without boosting long-run economic growth.
