As you’ve most likely heard, there is big news coming out of D.C.: The so-called “Big Beautiful Bill” passed just before the July 4th holiday. This is big news for many reasons (some good and some not-so-good, depending on your fiscal conservatism; i.e., the increasing federal deficit), but I’m going to focus on the positive news for retirees (or those nearing retirement) and their taxes.
Note: My source for the data and provisions in the new bill for this post was a recent article from the Tax Foundation (https://taxfoundation.org/research/all/federal/big-beautiful-bill-senate-gop-tax-plan/)
Before I get into the specifics, I want to say that “No tax on…” doesn’t always mean no tax ever, in every situation. Each of the “No Tax” provisions has exclusions, typically for high-income households. Plus—and this is a big one–these “no tax” provisions are only in effect by law through 2028. So, if Congress doesn’t extend them, they will expire.
The good news is that the lower tax brackets introduced in 2017 (effective in 2018) have no expiration date unless Congress changes them in the future.
No tax on tips or overtime
This is a temporary tax deduction equal to the qualified tips received during 2025 through 2028. The government plans to publish a list of occupations that traditionally and customarily receive tips that will qualify for the deduction.
There is an exclusion for “highly compensated employees” under current IRS rules, with a threshold of $150,000 in 2025.
This applies to those near or already in retirement and working for tips. I’ve heard that many people who work for tips pay little or no tax on them in the first place. Hmm…making $150k with tips—I want to work at that restaurant!
The “no tax on overtime” establishes a deduction equal to the “qualified overtime” received during the year through 2028. “Qualified overtime” is defined as overtime compensation paid under Section 7 of the Fair Labor Standards Act of 1938. Employers are required to include overtime on the W-2.
Once again, highly compensated employees, $150,000 in 2025, are excluded.
I believe many people will benefit from the “no tax on tips” provision. For many people, overtime work is a big part of their income. Near retirees or retirees who are still working for an hourly wage that pays overtime (usually time and a half) will benefit greatly.
“Bonus” deduction for seniors
The new law includes a special “bonus” deduction of $6,000 per person aged 65 or older. However, the $6,000 will be reduced by 6% of the amount by which your adjusted gross income (AGI) exceeds $75,000 ($150,000 if you are filing jointly).
For example, say you have AGI of $85,000, but you’re a single filer and the threshold is $75,000 ($10,000 excess):
$10,000 x 0.06 = $600. So, your new deduction is $5,400 ($6,000 – $600).
Here’s what the phase-out looks like for different levels of AGI:
As noted earlier, this provision is temporary and will remain in effect from 2025 through 2028, unless extended by Congress.
Increased standard deduction
With the expiration of the 2017 tax law, the standard deduction was set to be cut roughly in half starting in 2026, and the personal exemption was scheduled to return. The new bill eliminated that expiration and made the current standard deduction permanent.
Under the new law:
- For 2025, the standard deduction for married couples filing jointly is $31,500 (a $1,500 increase). This change is permanent. The standard deduction for a single filer was to be $15,750, which was also made permanent (a $750 increase).
- Couples where both spouses are 65 or older can claim an additional $1,600 for each qualifying spouse. (This was already in the tax code and remains.) This totals $3,200 for the couple, bringing their standard deduction to $34,700 (= $31,500 + $3,200).
- Single filers can claim an additional $1,600 deduction.
- Additionally, there is a new temporary bonus deduction of $6,000 per individual or $12,000 for couples aged 65 and older that can be “stacked” on top of the standard deduction.
- As discussed above, the “bonus” deduction is temporary (available from 2025 through 2028). That brings the total deduction for couples over age 65 filing jointly to $46,700 (= $34,700 + $12,000).
Extension of tax rates
This one is a biggie! As you may be aware, the existing tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and 37% were originally scheduled to sunset in 2026, with the top rate reverting to 39.6%. The new bill permanently locks in the current rates starting in 2026.
What happened to “no taxes on Social Security”?
I’m glad you asked! The senior bonus is designed to help offset the taxes that many seniors (including yours truly) pay on their Social Security benefits. However, although the “bonus” will provide some tax relief, it doesn’t eliminate taxes on Social Security benefits, which was a promise made during the campaign. Instead, it offers a deduction that can reduce overall taxable income for eligible seniors. (This was a change in the bill made in the final Senate version.)
Therefore, the 2025 tax law doesn’t eliminate federal income tax on Social Security benefits–Social Security is taxable just as before. It doesn’t matter if you’re receiving Social Security; you’re still eligible for the bonus if you’re over 65. However, combined with the institution of the previously enacted tax cuts, this remains a positive development for seniors in terms of taxable income and taxes owed.
Still, some critics argue that while the senior bonus may benefit some middle-income seniors, it may not provide relief to lower-income seniors who typically do not have sufficient tax liability to benefit from such deductions in the first place. On the other hand, those individuals are likely paying little or no tax in the first place.
Because most seniors are taking the Standard Deduction, this will be a big help.
2025 tax example
Here’s an example of a 2025 tax return based on the new tax law. (I’m keeping it simple with round numbers, like a 50/50 split for RMDs and Social Security, but you will see how the new law affects things no matter what. You can plug in your numbers—less Social Security or RMDs, less or no QCDs, etc.—and come up with an estimate of your own.)
Assumptions:
| Category | Amount |
|---|---|
| Total Gross Income | $100,000 |
| → Social Security | $50,000 |
| → RMDs | $50,000 |
| Qualified Charitable Distributions (QCDs) | $15,000 (from RMDs) |
| Taxable RMDs | $50,000 – $15,000 = $35,000 |
| Filing Status | Married Filing Jointly |
| Age | Both spouses are 65+ |
| Standard Deduction (2025) | $31,500 |
| → Age 65+ Addition | $3,200 ($1,600 × 2) |
| → Senior Bonus Deduction | $12,000 (couple total) |
| Total Deduction | $46,700 |
Calculations:
Taxable RMDs: $50,000 − $15,000 = $35,000
Provisional Income (for Soc. Sec. tax): 0.5 × 50,000 + 35,000 = 25,000 + 35,000 = 60,000
$60,000 is still above the $44,000 threshold; therefore, 85% of Soc. Sec. is taxable: 0.85 × 50,000 = 42,500
Adjusted Gross Income (AGI): 35,000 (RMD) + 42,500 (SS) = 77,500
Subtract Standard Deduction: 77,500 − 46,700 = 30,800 Taxable Income
Federal Income Tax Estimate (2025 Rates):
| Bracket | Rate | Range | Tax Amount |
|---|---|---|---|
| First $23,200 | 10% | $0 – $23,200 | $2,320 |
| Next $7,600 | 12% | $23,201 – $30,800 | $912 |
| Total Tax | $3,232 |
2025 Tax example–lower income, no RMDs, no QCDs
Here’s a similar example but with lower gross income and pre-RMDs and QCDs.
Assumptions:
| Category | Amount |
|---|---|
| Total Gross Income | $60,000 |
| → Social Security | $40,000 |
| → Traditional IRA Withdrawals | $20,000 |
| Filing Status | Married Filing Jointly |
| Age | Both spouses are 65+ |
| Standard Deduction (2025) | $31,500 |
| → Age 65+ Addition | $3,200 ($1,600 × 2) |
| → Senior Bonus Deduction | $12,000 (couple total) |
| Total Deduction | $46,700 |
Calculations:
Provisional Income (for Soc. Sec. tax): 0.5 × 40,000 + 20,000 = 20,000 + 20,000 = 40,000
$40,000 is below the $44,000 threshold; therefore, 10% of Soc. Sec. is taxable = 4,000
Adjusted Gross Income (AGI): 20,000 (IRA Withdrawals) + 4,000 (Taxable SS) = 24,000
Subtract Standard Deduction: 24,000 – 46,700 = –22,700 Taxable Income
Total Tax = 0
The high standard deduction, which is significantly helped by the additions, results in a negative taxable income in this case. A negative taxable income number, which means that your deductions exceeded your taxable income, is not that uncommon. The immediate result is no tax liability.
Another 2025 example (single filer)
Since the numbers are somewhat different, here’s an illustrative 2025 tax scenario for a single filer over age 65 with:
- $80,000 total income
- Split 50/50 between Social Security and RMDs
- $10,000 in QCDs from the RMDs
- Taking the standard deduction
| Item | Amount |
|---|---|
| Total Income | $80,000 |
| → Social Security | $40,000 |
| → RMDs | $40,000 |
| QCDs (from RMDs) | $10,000 |
| Taxable RMDs | $30,000 |
| Filing Status | Single |
| Age | Over 65 |
| 2025 Standard Deduction | $15,750 |
| → Age 65+ Additional | $2,000 |
| → Senior Bonus Deduction (2025–28) | $6,000 |
| Total Standard Deduction | $23,250 |
Calculations
Provisional Income (for Soc. Sec. tax): 0.5 × 40,000 + 30,000 = 20,000 + 30,000 = 50,000
$50,000 is above the $44,000 threshold; therefore, 84% of Soc. Sec. is taxable = 33,600
Adjusted Gross Income (AGI): 30,000 (Taxable IRA Withdrawals) + 33,600 (Taxable SS) = 63,600
Subtract Standard Deduction: 63,600 – 23,250 = 40,600 Taxable Income
Taxable Income = $63,600 – $23,000 = $40,350
Federal Income Tax Estimate (2025 Rates):
| Tax Bracket | Rate | Taxable Range | Tax Owed |
|---|---|---|---|
| First $11,600 | 10% | $0 – $11,600 | $1,160 |
| Next $28,750 | 12% | $11,600 – $40,350 | $3,450 |
| Total Tax | $4,610 |
For this example, the lower standard deduction (before the BBB) is why the taxes are relatively higher than for couples; however, it is offset by the $6,000 bonus deduction.
Wait and see
These are preliminary estimates and are intended to be informational, not tax planning advice. It’s always best to wait to see the IRS interpretations of the laws and how they are implemented in their rules (they can change slightly). That will take some time. In the meantime, try to understand it and how it might impact your situation. I’ll be watching it closely and will probably do a follow-up article in the Fall.
My source for tax bill data and provisions is the Tax Foundation (https://taxfoundation.org/research/all/federal/big-beautiful-bill-senate-gop-tax-plan/).