How Would the Proposed $4,000 Senior Deduction Compare to No Tax on Social Security?

During the 2024 election campaign, President Trump promised that he would eliminate all income taxes on Social Security. The House-passed “One, Big, Beautiful”  reconciliation bill does not include this provision, but does increase the additional standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. for seniors. While both policies would generate little economic growth relative to their costs and increase the deficit, they have differing impacts on households 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 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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.

Under current law, seniors are already eligible for an additional standard deduction. Seniors over the age of 65 may claim an additional standard deduction of $2,000 if they are married or $1,600 if they are unmarried and not a surviving spouse. The proposal in the House reconciliation bill provides an additional senior deduction of $4,000 per individual for 2025 through 2028, and makes it available to itemizers. The deduction would phase out at a 4 percent rate when modified adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” (adjusted gross income plus any tax-exempt interest income) exceeds $75,000 for single filers and $150,000 for joint filers.

The following table compares the distributional effects of the increased senior deduction to repealing income tax on Social Security benefits, assuming all other individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. changes in the House reconciliation bill are implemented. The increased senior deduction would increase after-tax incomes for the lower-middle- and middle-income quintiles the most. The bottom quintile would only see a small increase in their after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. , 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

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, May 2025

Exempting Social Security from income taxation would not change the after-tax tax income for the bottom quintile, as those households are already exempt from taxation on their Social Security benefits. The tax cut would be tilted more towards those higher-income households than the proposed $4,000 deduction: 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 the House reconciliation bill.

Overall, the increased senior deduction with the phaseout would deliver a larger tax cut to lower-middle- and middle-income households compared to exempting all Social Security benefits from taxation, and would not weaken the trust funds. But given the temporary nature of the policy, it would increase the deficit-impact of the House reconciliation bill without boosting long-run economic growth.

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