Tax Preparation & Planning Services for Individuals with Equity Compensation

I mentioned in my last post to watch out for misinformation regarding the One Big Beautiful Bill Act (I’m calling it OB3). Let’s talk about one of the bigger ones (in my opinion): the supposed deduction that makes Social Security payments nontaxable.

This one really irritates me because the Social Security Administration sent out an e-mail shortly after the passage of the bill with some misleading information.

• “The bill ensures that nearly 90% of Social Security beneficiaries will no longer pay federal income taxes on their benefits…” – possibly true, but misleading
• “The new law includes a provision that eliminates federal income taxes on Social Security benefits for most beneficiaries…” – false
• “Additionally, it provides an enhanced deduction for taxpayers aged 65 and older…” – the “enhanced deduction” part is true, but that’s not “[in addition]” to any other related tax break or change.

First off, the calculation of whether or not your Social Security benefit payments are taxable has NOT changed. Social Security is taxed based on your “provisional income.” This means that Social Security “looks” for and at any OTHER income on your tax returns to determine if there’s a tax bill on those Social Security benefits payments. If you have little-to-no other income and more modest SS, there will be little-to-no tax on your SS. But if you have higher income (dividends, 401k withdrawals, IRA withdrawals, etc.) and/or higher SS, some-to-most of your Social Security benefits will likely be taxed.

The new OB3 law created a new deduction (actually a LOT of new deductions), and one specifically for citizens over 65 years old.  This set of deductions has a unique spot in the tax calculation.  I am proposing we call this type of deductions “midline” deductions, because they are neither “above-the-line” or “below-the-line” in the way we’ve historically come to understand income tax breaks.

If a taxpayer is 65 years or older at the end of the tax year, and is below the Modified Adjusted Gross Income (MAGI) threshold of $150K for married filing joint ($75K for all other filing stati), there is a $6K deduction ($12K is spouses are filing joint and both 65+ and under the income limits). There is a phase out calculation starting at that income threshold.

So here’s how this plays out to contradict the myth that Social Security benefits payments are nontaxable:

• Married taxpayers start taking Social Security retirement at age 62. No deduction because they aren’t old enough.
• A single taxpayer, age 67 is waiting to collect Social Security until benefits max out at 70.  MAGI of $60K, this taxpayer will get a $6K “midline” deduction even though there is no Social Security income received.

If you need help and want to walk through the implications of this in your tax situation, please reach out to book a planning meeting.