The nine most terrifying words in the English language are “I’m from the government and I’m here to help,” according to Ronald Reagan. Shortly after the Big Beautiful Bill passed, the Social Security Administration sent out an email to all with an online account that the bill had essentially eliminated taxation on Social Security. The problem is that this was not true and a few days later a correction was posted on their website. Notably no second email or alert was sent out correcting the false statement, just a footnote on their webpage.
What really happened with the Big Beautiful Bill is that anyone that is 65+ will now pay tax on $6,000 less of their income, whether it is Social Security or something else, through a new bonus deduction. So unless you were in a very small group of people that paid tax on $1 to $6,000 of your Social Security and no tax on anything else; taxation on Social Security was not eliminated. There is one big caveat to this new deduction too if you’re not a member of this very small group. If your income starts getting too high, you start losing the deduction. For those filing single that threshold is $75,000 and married $150,000 and is before you start subtracting off deductions.
So how does this new deduction lead to an increase in taxes on retirement accounts? Simple. If you want to take money out of a pretax retirement account like an IRA, or most 401ks, and you’re near or above these thresholds you’ll start facing a double tax. You’ll pay the normal taxes due on the retirement account withdrawal plus you’ll have to pay additional taxes due from losing some or all of the new tax deduction. We walked someone through a scenario recently that would have seen them pay an over 48% tax on a pretax retirement account withdrawal because of this scenario! Since this person had assets in other accounts, we recommended they take the money they needed from a non retirement account rather than face losing nearly half to Uncle Sam.
This isn’t the only new hit a retiree can face under the Big Beautiful Bill either. If you pay a lot in state and local taxes, you might get hit with a new phase out on those deductions as well. If you itemize your deductions and do charitable giving, you’ll only be able to deduct any charitable gift that is over 0.5% of your income and will actually see a tax increase compared to before. Higher earners will see the worst of this when it comes to charitable giving as they’ll only get 35 cents on the dollar as a deduction instead of 37 cents on top of not being able to deduct the first 0.5% of their income. Thankfully a provision similar to what happened during COVID where an individual can deduct up to $1,000 (married is $2,000) of any cash gifts to charity even if not itemizing deductions made its way into the final version of the bill, but those that do more giving will still be worse off than before.
These are just a few of the many gotchas in the new tax code coming with this new bill. Some have already gone into effect, while others won’t start until next year or even further in the future. Tax planning for and in retirement just got even more important and impactful than it was before if keeping more of your own money is important to you. After passing the Big Beautiful Bill there’s been a lot of declarations similar to “I’m from the government and I’m here to help.” Those in or near retirement would be wise to heed what Reagan said about those words and even wiser to seek help from a financial advisor or firm that specializes in the type of tax planning we do.
Material discussed is meant for general/informational purposes and is not intended to be used as the sole basis for any financial decisions, nor be construed as advice to meet your particular needs. Please consult a financial professional for further information.
Recent Comments