VOLUME 17 | ISSUE 4
Navigating OBBBA 2025: A Guide for Retirees
The One Big Beautiful Bill Act (OBBBA), signed into law in July, reshaped the tax landscape for retirees. For the next few years, many will benefit from reduced federal tax burdens, as OBBBA makes the 2017 lower tax brackets and higher standard deductions permanent and adds a temporary “senior bonus deduction” for retirees over age 65. Here’s what you need to know regarding key provisions affecting retirees:
Permanent Tax Cuts: The lower income tax brackets and higher standard deductions introduced in 2017 are now permanent. This means retirement account withdrawals, pension income, and investment earnings will continue to be taxed at historically low rates.
$6,000 Senior Bonus Deduction: Retirees age 65+ can now deduct an additional $6,000 each ($12,000 for couples), on top of the standard deduction. Unlike most deductions, this bonus applies whether you itemize or not. It phases out at higher incomes (starting at $75,000 for singles and $150,000 for joint filers, and is eliminated entirely at $175,000 for singles and $250,000 for couples) and is scheduled to expire after 2028.
Other Deductions: The cap on state and local tax deductions increases temporarily to $40,000 (from $10,000), though high-income households may see it phased out. A few niche deductions (car loan interest, overtime pay, tip income) were also introduced but are less relevant for most retirees.
Reduction in Healthcare Subsidies: OBBBA trims certain Medicaid and ACA subsidies over the next decade. Older adults relying on Medicaid (e.g., for long-term care) may face tighter eligibility and higher out-of-pocket costs. Medicare wasn’t cut directly, but a 2010 law could trigger up to $491 billion in Medicare reductions from 2027–2034 (unless Congress intervenes) because OBBBA is projected to add $3.4 trillion to the deficit.
Notably, rules for retirement accounts and required minimum distributions (RMDs) were largely unchanged.
Social Security Taxation
Some commentary around OBBBA has caused confusion about how Social Security benefits are taxed. Under current law, the IRS uses “combined income” (i.e. Adjusted Gross Income + half of Social Security + tax-exempt interest) to determine how much of your Social Security benefits are taxable. The thresholds, unchanged since the 1980s, are:
Combined Income (Single) | Combined Income (Joint) | Taxable Portion of Benefits |
Up to $25,000 | Up to $32,000 | 0% |
$25,001–$34,000 | $32,001–$44,000 | Up to 50% |
Above $34,000 | Above $44,000 | Up to 85% |
OBBBA did not change these thresholds or formulas. Whether Social Security benefits are taxed depends on the long-standing “combined income” formula, not on OBBBA.
However, because OBBBA makes the 2017 bracket structure permanent and adds the “Senior Bonus” deduction, many Social Security recipients with modest non-Social-Security income may owe little or no federal income tax on their benefits.
For example (assuming no tax-exempt interest and income below the phase-out thresholds):
Single filer: $30,000 in Social Security benefits and $19,000 in IRA withdrawals can result in no taxable income after applying the 2025 standard deduction ($15,750), the additional age-65 deduction ($2,000), and the $6,000 senior bonus deduction.
Married filing jointly: $40,000 in Social Security benefits and $33,000 of other income can similarly lead to little or no tax after the 2025 standard deduction ($31,500), two age-65 add-ons ($1,600 each), and the two-person senior bonus ($12,000 total).
Note that whether a given household ends up with zero taxable income depends on its full income mix, deductions, and whether the new senior deduction is reduced by the phase-out.
We’ll discuss planning strategies next, including how to manage your other income sources to make the most of these tax breaks.
Planning Implications for Retirees
The changes from OBBBA present both opportunities and new pitfalls for retirement planning. Here’s how to think about your income strategies now:
Withdrawal Strategies: From 2025 through 2028, taxpayers age 65+ can claim the new $6,000 per-person “senior bonus” deduction (phasing out above $75,000 MAGI for singles and $150,000 for joint filers) in addition to the regular standard deduction and the age-65 add-on. For 2025, a married couple where both spouses are 65+ can have total federal deductions of about $46,700 ($31,500 standard deduction + $3,200 age-65 add-ons + $12,000 senior bonus). That means some couples with modest non-Social-Security income can potentially withdraw roughly $46,700 from tax-deferred accounts and still owe little or no federal income tax, provided they’re below the phase-out thresholds and the computed taxable portion of Social Security (under IRS Publication 915) doesn’t push their taxable income above zero.
Roth Conversions: With low tax rates extended, there is less urgency to rush conversions before their previously anticipated sunset at the end of 2025. However, large conversions could raise your adjusted gross income (AGI), triggering higher Medicare premiums or phasing out the senior deduction. Small, gradual conversions are often more effective. Consider converting just enough each year to “fill up” your current bracket (e.g. the 22% bracket) or use up your deduction room, without crossing penalty thresholds. As this is a complex area, we recommend reviewing multi-year tax projections that factor in Social Security taxation and IRMAA brackets.
Managing RMDs and Other Income: Required minimum distributions still add to taxable income. During the deduction window, taking slightly larger distributions may be beneficial. Beyond 2028, retirees may face higher effective tax bills if the senior deduction is not renewed. Tools like Qualified Charitable Distributions (QCDs) can offset income without raising AGI, while any deferred compensation or annuity income should be carefully integrated into broader withdrawal plans.
Social Security Timing: The Senior Bonus deduction applies regardless of claiming status but is temporary. Claiming decisions should still primarily hinge on longevity and income needs. For higher-income households, the extension of lower tax rates means benefit timing is less about taxes and more about cash flow and security.
Practical Takeaways
Take advantage of the “Senior Bonus Deduction” in the 2025–2028 tax years. For those over 65, this is an ideal time to make additional distributions from tax-deferred assets, do modest Roth conversions, or rebalance investments with a reduced tax impact.
Monitor thresholds. Rising AGI can erode deductions and increase Medicare premiums. Track realized gains, conversions, and RMDs.
Stay tax-efficient. Employ QCDs, smart withdrawal sequencing, and opportunistic gain/loss management to keep AGI low.
Plan beyond 2028. The Senior Bonus is set to expire; build flexibility so you’re not surprised by higher effective rates later.
The One Big Beautiful Bill Act offers meaningful relief for retirees, but many provisions are temporary. The next few years present a unique planning opportunity to maximize deductions and minimize taxes.
At Armor, we are here to guide you through these changes by reviewing strategies ranging from optimizing withdrawals, planning Roth conversions, and aligning Social Security timing with your broader financial goals. If you’d like a personalized review of how OBBBA may affect your plan, please reach out to schedule a conversation.
Our mission is simple: to help you keep more of your retirement income, minimize surprises, and enjoy the retirement you’ve earned.
