Today, over half of beneficiaries pay tax on their benefits — a trend that may be temporarily reversed thanks to a new tax law known as the One Big Beautiful Bill Act (OBBBA). Let’s take a closer look at how we got here — and what may be changing in the years ahead.

A Brief History: When Social Security Became Taxable

• 1983: Congress passed the Social Security Amendments of 1983, signed into law by President Ronald Reagan. For the first time, up to 50% of Social Security benefits could be subject to federal income tax for higher-income recipients.
  
  
  • This applied to individuals with "combined income" (AGI + nontaxable interest + ½ of Social Security benefits) above $25,000, and joint filers above $32,000.
    
• 1993: Under President Bill Clinton, the rules expanded. A second tier was introduced, allowing up to 85% of benefits to be taxed for individuals earning above $34,000 and joint filers above $44,000.
  
  
• No Inflation Adjustment: Critically, these income thresholds were never indexed to inflation. As wages, investment income, and pensions rose over time, more and more retirees found themselves paying tax on benefits once thought untouchable.
  

Then vs. Now: Taxation of Social Security Benefits

In 1984 (first year benefits were taxed):

• Only about 8% of Social Security recipients had to pay federal income tax on their benefits because the thresholds at that time were considered relatively high and only affected higher-income retirees.

Today (as of 2024 data):

• Roughly 56% of recipients now pay taxes on some portion of their Social Security benefits due to the fact the thresholds have never been adjusted for inflation.

How the Tax Works Today

• Up to 85% of a recipient’s benefits may be included in taxable income depending on their combined income.
  
  
• For many retirees with modest IRA withdrawals, part-time work, or taxable pensions, this taxation is unavoidable — even though they may not consider themselves "wealthy."

This has made tax-efficient retirement income planning a critical area of focus for financial professionals.

Enter the OBBBA: A Temporary Shift in the Tax Landscape

The One Big Beautiful Bill Act (OBBBA), signed into law in 2024, does not alter the taxation thresholds or formulas for Social Security benefits. But it does create a powerful offset:

Enhanced Standard Deduction for Seniors

• Taxpayers aged 65 and older will receive:
  
  
  • $6,000 extra per individual
    
    
  • $12,000 extra per couple
    
    
• Phases out at:
  
  
  • $75,000 – $175,000 for single filers
    
    
  • $150,000 – $250,000 for joint filers
    

This deduction reduces taxable income, thereby shielding more retirees from having to pay tax on their Social Security.

Resulting Impact

• Under prior law: ~40% of Social Security recipients owed federal tax on their benefits.
  
  
• Under OBBBA: As many as 88% may owe no federal tax on benefits — at least temporarily.
  
  

Important Note: The OBBBA deduction is set to expire after tax year 2028, unless extended or made permanent by future legislation.

Advisor Insight: What This Means for Retirement Planning

While OBBBA may temporarily reduce tax liability for retirees, it doesn’t change the long-term trend toward wider benefit taxation. In fact, if inflation continues and thresholds remain frozen, even more retirees will eventually face benefit taxation once the OBBBA deduction sunsets.

Here’s how advisors can help:

• Use Roth conversions in low-income years to reduce future RMDs and taxable income.
  
  
• Leverage qualified charitable distributions (QCDs) to lower adjusted gross income.
  
  
• Coordinate Social Security claiming strategies with tax bracket management.
  

Final Thoughts

The taxation of Social Security benefits has quietly become one of the most impactful hidden taxes in retirement. Although the OBBBA provides temporary relief for many, the underlying issue of unchanged thresholds and expanding tax exposure remains.

For clients nearing or in retirement, now is the time to assess how income flows — from IRAs, pensions, and Social Security — interact with tax rules. Advisors who guide their clients through this complexity will continue to deliver significant value in the years ahead.

‍