Retirement Tax Planning Around Senior and SALT Deductions in the One Big Beautiful Bill Act

The One Big Beautiful Bill is here and you want to know how is it going to impact you and your retirement. There are two components: the senior deduction and also the SALT cap, the increase to the state and local income tax deduction that I’m going to focus on in this video. And I’m going to do a couple of things. I’m going to explain them to you, including the phase outs and how long they’re here, but I’m going to show you some examples. And the goal here is to help you start to grasp, help you start to understand how these different components of not just the new legislation, but of the overall income tax code itself, how they all kind of work together so you can start to understand a little bit better about how taxes impact you and your retirement with the ultimate goal to help you pay less tax.

Exploring the Senior Deduction

So first and foremost, the senior deduction. Now we’re not going to call this a social security deduction because it is an age 65 benefit. So whether you’re taking social security or not, if you are 65 or above, you qualify for this deduction. Now originally the plan was to make social security tax free for all people receiving it. That wasn’t fiscally viable.

So what they did is they added this senior deduction in, and the end result is, according to a few different sources, about 88 % of people who receive Social Security will not pay any income taxes on that benefit. But very important to point out, you do not have to take Social Security or have taken it yet to receive this deduction.

So if you’re a single taxpayer or married filing jointly, it is a $6,000 deduction if you’re single. It is a $12,000 deduction if you’re MFJ.

Now, I have these numbers here because these are what we call phase outs. So all a phase out means is once your modified adjusted gross income, so essentially it’s your adjusted gross income, it’s all of your income, but you have to add back in like your tax exempt interest from municipal bonds, possibly a few other items. But once your income hits 75,000, the deduction starts to whittle away. And then once your income gets all the way up to 175,000, the deduction is completely whittled away or phased out. So when you hear the term phase out, that’s all it means.

There’s a threshold that it kicks in and then another threshold to where the deduction is fully gone. So $6,000 is the deduction. If you’re 65 and above, the phase out starts at $75,000. And once you get to $175,000, it goes away entirely. If you’re married filing jointly, the deduction is $12,000 and your phase out starts at $150,000 of modified adjusted gross income. Whittles away as your income goes through this threshold. And if you get to 250, the deduction is entirely gone.

How Does a Phaseout Actually Work?

So how does the phase out actually work? Well, it’s six cents on every dollar that you’re above the first threshold. So if you’re a single taxpayer and you have $100,000 of modified adjusted gross income, well, the threshold starts at $75,000 for a single taxpayer. But if you’re at $100,000, you’re $25,000 over that threshold.

So all you do is you multiply the dollars that you’re above the threshold times 0.06. This comes up to $1,500. So your standard or senior deduction reduces by $1,500. So instead of being $6,000, it’s now $4,500. So these phase outs are throughout the entire tax code. And it’s just important I wanted you to understand how they actually work, how they’re calculated, because if you fall into this range, then you’ll be impacted.

Basics of the Tax Code

Now I’m going to spend a few minutes here with just some real basics of the tax code because the fundamentals or the basics, that’s really what you need to start grasping in order to really do some of your own tax planning. So we’re just going to start with the standard deduction and show you what it is today and how this new senior deduction impacts you or how it increases it overall. So if you’re a single taxpayer, your standard deduction is 15,750.

We’re gonna do some examples of this in just a minute so you can actually see it in context of how it actually works. There’s another deduction called a bonus deduction or an extra deduction, $2,000, and then you have the senior deduction if you’re over the 65, over age 65. Both of these though are for age 65 and above. So if you’re 63 in a single taxpayer, your standard deduction is 15,750.

Married filing jointly is $3,500 plus $3,200. That’s your extra. So it’s $1,600 per spouse for $3,200 plus the senior deduction of $12,000. So it’s $6,000 per spouse. This gets you up to $46,700. So if you’re over the age of 65 and single, $23,750 is your total standard deduction. And if you’re married filing jointly, it’s $46,700. So when you hear deduction, standard deduction,

Many of you aren’t CPAs. You don’t do your own taxes, but you’ve recognized these terms. When we look at these numbers, all they are are they are reductions in your income to get to the amount of income the government says you owe taxes on. So if you make $2 and then you deduct one, you’re left with $1, that $1 is your taxable income. So it’s just deductions from your gross income to get to a mathematical number that you pay tax on. Now, to expound upon that a bit further, I have some real life numbers here.

If you’re a single taxpayer, $50,000 of gross income, you’re 65 or older, your total standard deductions are 23,750. You subtract those out, 26,250, that is your taxable income. That then is what you pay tax on. So some of that goes into the 10 % bucket. Theoretically, you have a 12, you have a 22, you have a 24. But at this level of income, you’re not paying much tax at all. But that’s how that standard deduction works. Same thing if you’re married filing jointly, 70,000. Gross income minus your standard deduction leaves you with $23,250.

When One Spouse Predeceases the Other

Now, a very important part of the tax code that you need to understand for planning purposes, and it’s not the best one to look at, but it is important to understand, is that when one spouse predeceases the other, you do go from the Mary filing jointly to the single brackets. So we talk about this with clients a lot. We talk about this in some of our other videos here, but from a tax planning perspective, it’s important because you see here, all the extra benefits. So we get this larger deduction. Even though we have more income, we actually have a smaller taxable income base here, and the brackets are larger, meaning you can have twice the amount of income almost, depending on which bracket you’re in, but around that, and be in the same bracket as you would be over here. So you lose the deductions, your buckets, your tax brackets, they drop significantly.

It’s just something to be aware of because where it really can impact you is when you have large retirement account balances. Those large retirement accounts, you’re forced to distribute money from them. When one spouse predeceases the other, let’s say you’re in your 80s, all of a sudden now you’re going into a single tax bracket and now you still have to take those very large required minimum distributions and you could see your taxes jump fairly significantly. So just be aware of it.

But this is the point of the video. This is the point of the channel is to help you start to think about some of these scenarios from a tax perspective, starting to look at things through a tax lens. We don’t necessarily want to let the tax tail wag the dog, but we need to be aware of what the tail is doing so we can make better decisions when we’re looking at challenges and situations that come up holistically.

How Long is the Senior Deduction Available?

One last thing on the senior deduction is that it’s only here until 2028. So tax year is 2025 through 2028. You’re filing your taxes April 15th of 2029 for 2028 here.

So this is a limited time senior deduction. So maybe you accelerate some income, maybe you do some Roth conversions, take advantage of that extra deduction because if you do a $12,000 Roth conversion, you’re married filing jointly, you get to deduct that with that senior deduction. So it may make sense for you. Of course, you want to talk to your CPA, you want to run some different scenarios, model it out so you can help make the best decision for you and your family. And of course, if you need any help with that, just reach out to us. This is what we do as part of the retirement success plan.

The SALT Deduction Explained

Now we have the SALT deduction. So SALT stands for State and Local Tax. So it has been increased to $40,000 from $10,000. So many of you probably remember, especially if you’re in a state that has high property taxes or high state income taxes, that once this changed in the original tax legislation, it was a pretty big deal because the federal government has essentially been subsidizing states by allowing them to have higher taxes. And then you could write it off on your federal tax return.

Well, in the original tax bill that was taken away, so there was a cap, $10,000 cap on how much you could deduct from your federal tax bill based on your state and local income taxes. So this has been a big deal for many years. So part of the new bill, this was one of the biggest sticking points of the entire legislation here. So they decided to raise it to $40,000. The phase out for the salt increase in the SALT cap starts at $500,000 of income and then completely goes away at $600,000 of income. So whether you’re single or married filing jointly, it doesn’t matter. The phase out begins at $500,000 and it’s completely gone at $600,000 of income.

So just a quick recap here is state and local taxes. If you have a state income tax, if you have property tax, if you have sales tax on large purchases, or if you want to keep receipts on all your purchases for your sales tax throughout the course of the year, this is an option that you have to deduct off your income, but you have to choose. Do you take the standard deduction or do you take the salt deduction? Because the salt deduction is itemized. So you have to choose. Do you itemize or do you take the standard? This is not in addition to everything that we talked about before, except for the senior deduction. So even if you itemize, okay, you keep your expenses, you have mortgage interest, you have property taxes, you have state income tax.

All that adds up and it makes sense for you to itemize your deductions. You can still take that $12,000 senior deduction on top of the SALT deduction if you’re married filing jointly. Of course, $6,000 if you’re a single taxpayer. So it’s kind of an interesting quirk here. Normally you have to either take the standard deduction or you itemize. Here, with this new legislation, you can itemize, take advantage of the higher state and local tax cap, $40,000 limit, deduct that and still take the senior deduction if you’re 65 or above.

A Couple Examples

Okay, so a couple of quick examples here, and then we’re gonna talk about choosing between that standard deduction, the senior deduction, the extra bonus deduction versus itemizing. Again, we’re just trying to help you understand how this works so you can make better decisions. So single person, $80,000 of income. Let’s say they want to itemize because they have high state income taxes and property taxes. You itemize, this is your $40,000 SALT, but you still get the senior deduction of $6,000 if you’re 65 or above. So 80,000 income minus your deductions leaves you with $34,000 of taxable income. Married filing jointly, same equation, except a little bit more income, you still deduct the state and local income taxes up to $40,000 cap. You get the senior deduction here of $12,000, but you don’t get the standard. You don’t get the 3,200, the extra because those are standard deductions.

Here we’re itemizing. So that’s an important, something important to understand about taking deductions. This leaves you with taxable income of $48,000, and then this is what you would pay tax on. And we’re gonna do a tax calculation near the end to show you how that works and how social security is taxed as well.

Making the Decision Between Itemizing and Taking Standard Deduction

Now we’re gonna look at making the decision between itemizing and taking the standard deduction. I wanna put a summary chart here, and it’ll start to click.

So if you’re single and less than 65, your standard deduction is 15,750. If you’re 65 or older, it’s 23,750. Married filing jointly, it’s 31,500 if you’re 65 or below, and 46,700 if you’re 65 or older. So now comparing the standard deductions here to the ability to itemize with this higher SALT cap. So clearly, if you’re younger than 65, and single or even 65 or older, and you have large property taxes, state and local taxes, the $40,000 salt cap is going to be a bigger benefit for you to itemize than taking the standard deduction because you get such a substantially higher deduction than your standard.

Now, if you’re married filing jointly, still it’s pretty clear if you’re less than 65, the $40,000 state and local tax exemption or excuse me, deduction is much higher than here.

But look, if you’re 65 or above, even if you have very high state and local income taxes, you’re still getting a higher standard deduction than that salt cap. But there are other itemized deductions as well. So if you have mortgage interest, for example, if you have large healthcare expenses relative to your adjusted gross income, I believe it’s more than 7.5 % of your adjusted gross income, whatever costs exceed that, you are able to itemize. So you would add that to your state and local property taxes, add that to your mortgage interest, and you have these itemized deductions.

So if you have a lot of itemized deductions, you can add that to the state and local property taxes, and it very well may make sense for you. But part of what they did the first time around with the new tax bill or the old tax bill now, the TCGA, TCJA, is they tried to make things more simple so you didn’t have to itemize, keep receipts, and I’ll do all this tracking.

They just increased the standard deduction and it worked. Most people stopped itemizing and I forget the numbers, but I believe it’s somewhere around 85 to 90 % of people have been taking the standard deduction. So it’s a bit more simple for people to do their taxes. But I just like to put it out in chart form here because if you are here in Texas, we don’t have a state income tax, but we do have fairly high property taxes, for example. So if you own a home here and you have mortgage interest, you have the property taxes, you have maybe some other expenses that you’re able to itemize, very well may make sense, especially if you’re less than the age of 65.

If you’re over 65 and married filing jointly, you definitely have to have some expenses to make it worth your while.

Taxation of Social Security Benefits

Okay, so now, don’t kill me here, but Social Security Taxation, something you want to know, it’s something that you’re interested in, I’m sure, but it is complex. So again, I’m keeping it high level, we’re gonna go through this, so hopefully you understand it.

And again, if you have some questions or have some comments, put them down below. I’ll either respond to them or do some type of follow-up video to address them if there’s enough. And of course, if you need help with social security or income planning or figuring out the taxes on all this, understanding how do you make the best decisions? How does it impact you and your family? Are you going to be okay? You can always reach out to us for that as well. So here we have a retirement income distribution scenario, and we’re gonna look at the taxes and how all of this comes together.

So if you are a self-director and you like to handle this stuff yourself, hopefully this helps you make better decisions, at least be more informed. So $50,000 IRA distribution, $50,000 in combined social security. We’re gonna look at married filing jointly here and $10,000 of municipal bond interest. So our actual income in this hypothetical scenario here is $110,000. That’s how much income we actually have coming in. We’ve chosen to distribute from the IRA.

This happens to be what the social security benefits are. And we made some investments where we have $10,000 of tax-free, federally tax-free, Munibond interest. $110,000 spendable income without getting, well, that’s the income. Okay, so I kind of, I parenthetically notated this because this is a separate calculation that we have to do to determine how much of your social security benefits are subject to income tax. Then we do a couple other calculations to actually get to the number.

So IRA distributions, but then what you do, you take one half of your social security benefits. So it was 50,000, you take half of that 25, and you also have to count the municipal bond income for this. This is a modified adjusted gross income calculation. It’s actually a different modified adjusted gross income calculation that I talked about above. I believe there are seven or eight different MAGI calculations that pertain to different aspects of the tax code.

This one is for Social Security. So again, without getting too deep here, your IRA distributions plus one half of your Social Security plus your municipal bond interest gets you to 85,000. You then have to say, $85,000, where does that fall into the Social Security tier? So there are three tiers. ⁓ This essentially means that you’re in the top tier. Up to 85 % of your Social Security benefits are subject to income tax.

Now notice I said up to because there’s phase outs when doing that calculation as well, which I’m not gonna get into because it is very complex, but just understand it’s up to, it’s either tax free 50%, up to 50 % of your social security could be taxed or up to 85%. When we get to 85,000 in this number, you’re almost at 85%, probably 83, 84. So, okay, now we have that number.

Of the Social Security benefits, the $50,000, this is what it actually comes to, $40,850 is subject to income tax. You have your IRA distributions here, so $50,040. You also have the Muniband income, but that’s not subject to income tax. That’s federally tax-free. So this brings your adjusted gross income when you look at your taxable Social Security benefits and your IRA distributions to $90,850.

I’m assuming the standard deduction is taken here. So now that we have our adjusted gross income, we’ve jumped through some hoops there. We subtract out, assuming you’re 65 or above, the standard deduction. So we reduce our AGI by this standard deduction. We get 44.150. That is our taxable income. Now, the first X amount of dollars go into the 10 % bucket. And then once that gets filled up all the way, the excess goes into the 12 % bucket.

So what it means here is total tax of $4,821. So what is the purpose of doing this exercise? One, to help you understand a little bit more about how social security is taxed, but really just to show you in real world how this deduction actually works to get to how much tax you pay. So this is a pretty big deal, adding $12,000 deduction to married filing jointly or $6,000 to single. At the end of the day, if you’re getting phased out or these dollars aren’t a large amount to you, maybe it’s not as big of a deal, but still, you can see anytime we can increase this deduction or your deductions, it really drops your income.

And because the TCGA originally has passed has been maintained, the tax buckets, the 10%, the 12%, the 22, the 24, they’re much bigger than they’ve ever been in your life. So you’re able to put more income into them and the rates are lower than they were previously. So you can get more income to the lower rate buckets and that helps you pay less tax in retirement.

Effective Tax Planning Strategies

All right, we’re gonna end on an actual tax calculation and I wanna show you how we would incorporate tax planning into an overall retirement income plan. Now this is something that all of our advisors here, we do this every single day for clients when we’re reviewing their income plans, their tax plans. So we’ll just, I wanna show you, lift the curtain a little bit and show you how this actually works.

So again, if you want help, reach out to us, but if you do this yourself, these are the things that you need to be considering when making decisions. And I want to add this, small decisions compound on each other over time. So even though let’s say one tax planning decision may save you three or $4,000 today, but you keep making those good decisions year after year after year after year, that’s where you get this compounding benefit of positive decision making in retirement.

It’s about making good decisions consistently over time, really amplifying the total value that you receive from those decisions. So this is the exact example that we looked at previously. So $10,000 of muni bond interest, $50,000 of IRA distributions, $50,000 of social security. I didn’t do the calculation myself for the taxable component. I cheated. I came over to the software, but… Makes my life a lot easier, makes everyone’s life a lot easier.

So $40,850, that’s the taxable component. Total income is $90,850. Your AGI is $90,850. You take your standard deduction because they’re both over the age of 65. So it’s the $31,500 plus the extra deduction of $3,200 gets us to $34,700. And then beneath that, you have your $12,000 senior deduction, which brings taxable income to 44.150, your total tax to 48.21. So something important here, this is where the tax planning comes in and having visibility, why it’s so important from a tax perspective. So our marginal bracket means the next dollar will be taxed at 12%, but that’s just looking at the tax brackets itself.

Unfortunately, what happens in the tax code is when you do take that extra dollar, a lot of times you drag something else into a state of taxation. In this instance, it’s Social Security. So it’s like a net. The tax code is like a net, meaning you take an extra dollar from here, it brings something else that was previously tax-free into now a state of taxation.

So I point this out because when we come down here, when we look at the effective tax on your next $1,000 of ordinary income, so let’s say you have normal bonds. They pay ordinary income or if you take an IRA distribution, that’s ordinary income. If we look at the effective tax, and that’s essentially looking at what are we totally going to pay because we’re looking at what else is being dragged into a state of taxation, it’s actually 22.2%. Versus the effective tax on the next $1,000 in capital gains, we’d only be paying 10%. So planning, hopefully you’re starting to see where I’m going with this, but you have some non-IRA assets, you have some retirement account assets, something comes up, you need to spend some money, you want to go on a vacation, whatever it may be, help out a child or a grandchild, you have to decide where am going to get the money from?

Well, if you take it from the IRA, even though marginally you’re in the 12 % bracket, you’re going say, you know what, 12%, I’m in the 12 % income tax bracket, that’s less than the 15 % capital gains rate, I’m going to take it from my IRA. Well, you’d be wrong, because when you look at the impact of all of your sources of income and retirement and the tax impact on them, you see here that you’re actually paying 22 % on that thousand dollars of ordinary income versus only 10 % on capital gains.

So look, I’ve done videos on this in the past. This itself could be an entirely different video and really I could break it down, chapters, it’d be an hour two or three long.

I just want you to understand for the purposes of this that just because this is your marginal tax rate of 12%, it doesn’t mean that that’s what you’re paying because if you take it from the IRA, you’re actually paying 22%. If you take it from your cap gains assets, you’re only going to pay 10. So this is tax planning. So this is having visibility into every decision that you make in retirement and how it impacts you now and in the future. So that’s the retirement success plan.

This is what we talk about, a large component of it at least, when we talk about income and tax planning, and hopefully this has helped you create a little bit more visibility into how the tax code works and some of the decisions that you have to make in order to have a successful retirement.

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