Protecting and Preserving Wealth Episode 72 – No Tax on Social Security

Speakers: Jon Gay, Bruce Hosler, Jason Hosler, & Alex Koury

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Jon Gay (00:10):

Welcome back to Protecting and Preserving Wealth. I am Jon Jag Gay and I’m joined by Bruce Hosler, Jason Hosler, and Alex Koury of Hosler Wealth Management. Great to be with all of you today.

Bruce Hosler (00:18):

Jon, great to be with you.

Jon Gay (00:20):

Bruce, for our video listeners, or I should say our video viewers, they’ll see on the screen here big letters: No Tax on Social Security. That is what we are going to tackle today.

Bruce Hosler (00:31):

Absolutely. The Big, Beautiful Bill Act. And on the next slide, you’re going to see that, that One Big, Beautiful Bill Act (the OBBBA) is what we’re talking about. And the surprise that I have for our listeners today is that this bill was kind of shared with us that it was going to be no tax on Social Security, and that’s not quite the way it works. Let’s look at the next slide, Jon.

Jason, when we talk about the Social Security benefit, it’s not really a Social Security benefit, but it does not mean that you will not pay taxes on your Social Security. What do I mean by that? Could some people still have to now pay taxes on their Social Security?

Jason Hosler (01:23):

Yeah, the way that they put this into the bill, it wasn’t tied to anybody receiving Social Security. It’s not tied to how much Social Security you get. And it does not exclude your Social Security from still being included in the various calculations such as your adjusted gross income, your taxable income, your provisional income calculation that it has traditionally been included in.

Bruce Hosler (01:50):

So, next, Jon. Alex, we found out that they’re changing the name on this, actually, the name of this benefit is the senior deduction. And it can potentially provide you with a tax deduction if you do not have too much income, but there’s another catch. If someone is receiving Social Security for the first year, Alex, and they’re 62-years-old, can they receive the senior deduction?

Alex Koury (02:20):

No, not at all. You have to be at least 65-years-old in order to receive that benefit.

Bruce Hosler (02:27):

And so, it may or may not offset some of the taxes on your Social Security benefits.

So, then the question becomes how much income is too much income to receive this, I guess, what I’m going to call the senior deduction is the Social Security tax deduction.

And the intent, I believe by President Trump and the people that passed this is the deduction is supposed to be big enough to offset your taxable Social Security income, because not everybody’s Social Security is taxable. It’s a tax deduction. That’s what it is. It’s a Social Security tax deduction, but it’s not relevant to that. Jason, how much does someone, per person at age 65, how much is this tax deduction?

Jason Hosler (03:28):

So, it’s a $6,000 tax deduction per taxpayer. So, if you’re married filing joint, that would be $12,000 between the two of you.

Bruce Hosler (03:38):

Okay, so let’s get into the details, Alex. Next slide, Jon.

So, no tax on Social Security deduction for 2025 is really the senior deduction and the legislation was in the One Big, Beautiful Bill Act and it created a temporary deduction for seniors age 65 and older. So, let me just pause right there. Well, what’s this temporary mean, Bruce?

Well, it starts right now in 2025, but look at bullet number two there Alex, through 2028. So, you got 2025, 2026, 2027, and 2028, the last year of President Trump’s presidency for taxpayers age 65 or older, and they can come claim an additional deduction of $6,000 per individual. Now, when we say additional Alex, we mean additional to what? And really, it means the standard deduction, right?

Alex Koury (04:37):

Exactly. So, most people today are still using the standard deduction as part of their tax planning for the year. So, you have that on top of your tax deduction, that’s going to give you your total potential deduction benefit that’s available to you based on income.

Bruce Hosler (04:54):

So, if you look here as a married couple on the bottom line there, a qualifying couple, both over 65 actually have the standard deduction plus this new senior deduction for a total of $46,700. So, Jason, if we have $46,700 in income and we’re over 65 this year, let’s say we have $50,000 in income. We have $50,000 income, me and Laura, let’s say — she’s not that old yet, guys.

But let’s just say that if she were, that we had $50,000 in income, are you telling me that we would only pay like what is it, $3,300 would be potentially included?

Jason Hosler (05:41):

Well, yeah, your taxable income then would be $3,300 including in your tax. It is that big of a deduction when you add it all up, if both are over 65, they’re 65 by the end of the year.

Bruce Hosler (05:52):

Wow. Jon, let’s move to the next slide here.

So, it begins at $150,000 for joint filers and it begins at $75,000 for single filers. So, that’s where the phase out begins. Now, it’s a federal income calculation when you’re calculating that tax on your Social Security on the federal income tax, that’s a formula that uses provisional income, and that provisional income determines if your Social Security benefits are going to be taxed or not. That has not changed for 2025.

So, that means if your income is too high and you used to pay taxes on your Social Security benefits, guess what folks? You will still do that.

Now, if your income is individual below $25,000, Social Security’s not taxable on married couples, below $32,000 of taxable income, wow, that’s not very big is it? But if your combined adjusted gross income is including IRA distributions and dividends and interest, non-taxable interest … just let’s pause right there for a second — Jason what is non-taxable interest that they’re talking about here that’s included in the calculation of provisional income to make your Social Security taxable? What is that?

Jason Hosler (07:14):

Government bonds, usually municipal bonds.

Bruce Hosler (07:17):

Municipal bond interest. And then Alex, when they say plus half of your Social Security, does that mean half of your Social Security’s taxable, or that’s what’s used in the formula?

Alex Koury (07:29):

It’s just what’s used in the formula. So, you have to add in half your Social Security plus all your other income sources there to get your provisional income.

Bruce Hosler (07:37):

And let’s just say for a married couple, if their income goes above $44,000, now 85% of their Social Security is included in taxable income for the year. So, those rules are all the same folks, they have not changed. Alright, Jon, let’s go to the next slide.

So, how long will this last? Well, we know it’s going to last for four years. Through the end of Trump’s term as a president in 2028, you’ll still get this deduction. So, you get it this year, 2025, 26, 27, and 28. Jason, what happens after 28?

Jason Hosler (08:16):

Well, 28, if Congress doesn’t take any action, this will sunset, it will only last through the end of that year. I think they’re going to be hard pressed of course, depending on what happens with that election at that point in time, but when you give a benefit like this out, it’s going to be harder for them to take it away.

Jon Gay (08:35):

This is almost like the Tax Cuts and Jobs Acts from the first Trump presidency where it had an expiration date on it, and it was going to sunset if Congress didn’t take any action.

Bruce Hosler (08:43):

That is exactly how it is, Jon. You’re exactly right. It would sunset just like that. But just like Jason was saying, Alex, what has our experience been when Congress introduces some new benefit? Let’s just look at like drugs for Medicare benefits, Part D on the Medicare plan when President Bush number two, when he introduced that, have they been able to take that away?

Alex Koury (09:12):

Nope. It’s harder to take it away once you’ve already given out that benefit, regardless of who is in the President role or any other governing official role. You can’t take away what’s already been given regardless. So, we think there’s a potential for it to last beyond that, but for now, we know at least through 2028, you will get this tax deduction.

Bruce Hosler (09:32):

Okay, so the next slide then kind of talks about this sunsetting that we’ve been talking about. And so, it goes back to the old rules. So, that deduction is automatically taken away unless Congress and the president at that time extends that out for a longer period of time.

Jon Gay (09:51):

And for those of you not on video, got to give you credit Bruce, for picking a beautiful picture of a great sunset.

Bruce Hosler (09:56):

(Laughs) Yes, thank you. Next slide.

So, then the question becomes, well, what if my income is too high, Bruce? What’s the phase out range? So, if we’re married filing joint, you start to get phased out at $150,000. Now, this $150,000, is this taxable income? Is this adjusted gross income? Well, what it is, is modified adjusted gross income, MAGI (modified adjusted gross income).

And when you get to $250,000 of modified adjusted gross income, there’s no more of that $12,000 deduction available. You have been limited out on all of that. And if you’re single, $75,000 to $175,000, we know that the percentage of limitation of the phase out. The phase out percentage is 6% of every dollar. So, every dollar above $150,000, you start to get phased out on 6% of that every year or every dollar as it goes up during the year. Alright, next slide.

So, of course I’m the author of Moving to Tax-Free. Jason and Alex are big subscribers. We’ve helped our clients move to tax-free. Here’s the question that clients ask is: how does this affect moving to tax free planning? Like what will happen on that? And I’ve prepared a couple of examples that I want to talk about. I want Jason and Alex to help feed in on this, but I want to pause right here. Jason, in my book, Moving to Tax-Free, I start off with the most important question.

Jason Hosler (11:36):

Yes.

Bruce Hosler (11:37):

If you look into the future in the next 10 years, do you believe that the tax rates will stay the same? Will they go lower, or will they go higher? Does that question still apply, Jason?

Jason Hosler (11:51):

Oh, the question totally still applies. I have been having conversations with clients and other folks who think that maybe that has changed with the recent election and the change in the Presidency and Congress and the passing of the One Big, Beautiful Bill that has made the Tax Cuts and Jobs Act tax cuts permanently part of the tax code.

But people need to remember that when we’re looking out at that long-term, we’re still looking at underfunded Medicare, underfunded Social Security, an amount of unfunded liabilities and promises that the US federal government has made to pay. And if you think that they’re just going to print all that money and push that through inflation, I think that they’re going to be hard pressed to be able to manage that and hold things together.

It’s going to be a combination of things. They’re going to cut spending, they’re going to raise taxes and they’re going to print more money. There’s a little bit of all of that. Now, we can quibble on the differences of how much one lever versus another’s going to get pulled. But if you think that that train is still not coming, just because we got one piece of legislation passed, you need to be taking a good hard look at the math in the long run.

Bruce Hosler (13:03):

So, next slide, Jon — Alex, we still have the national debt. What about that $37 trillion? Is that getting paid down?

Alex Koury (13:15):

It’s said that right now it’s kind of leveling off a little bit. We’re trying to get our head above water. We’re trying to generate enough revenues through taxes, through tariffs in order to basically have a surplus of some sort. We can start paying down our debts, but the reality is that that’s just one year of many years. And we’ve seen time after time regardless of who’s President, spending is still a problem in this country, and it’s going to continue to be a problem until we get our budget really under control.

Now, the hope is that of course, we can try and grow our way out of this debt hole, but it’s just pretty big and we see what’s happening with interest rates still today, we’re still very high. The interest we’re paying on our national debt is so astronomical. Almost a trillion dollars a year still on just our interest cost. So, it’s really hard to see a way out of this at this point.

Bruce Hosler (14:07):

Jon, let’s look at the next slide here. So, folks, I took a typical couple and I kind of gave the example. So, we’re talking about doing tax planning, moving to tax free in spite of the One Big, Beautiful Bill and the senior deduction. And on the left here for 2025, you can see we’ve got some … it’s the same couple and the difference is right here, line three, we have IRA distributions or a Roth conversion of $50,000. So, let’s just say they had a required minimum distribution of $50,000.

They took that out, they have taxable Social Security because of that Roth conversion or that RMD that they had to take out, they had a loss on the capital. So, capital gains, so the $3,000. Their total income was only $116,000. So, it was under the $150,000. So, they were able to get the $12,000 senior deduction down there, and you see their taxable income was only $69,000. And so, they owed 12% tax bracket, so $8,393 in taxes.

Same exact couple, all the same income and expenses except we decided to do a Roth conversion for a hundred thousand dollars. So, you see in the yellow, that income has increased to $150,000. So, what happens, their total income goes to $216,000. You can see I calculated the phase out at 6%. So, they still got a senior deduction of $8,000, they didn’t get the entire $12,000, but now their tax bracket, their gross tax bracket was 22%, and they had to pay taxes of $38,000.

Now, you look at that and you go, “Oh, well then that’s not worthwhile,” but my question is what do you do in four years if the tax rates go higher because of the Medicare trust fund is becoming insolvent? Or Social Security, and they’re going to cut your Social Security benefits, they’re saying 23% to 24% if they don’t make any changes.

Jon Gay (16:18):

Folks that are listening on the podcast and don’t see the screen, just to recap; the same exact couple, two different situations. The first couple had $50,000 in taxable IRA distribution, the second couple had $150,000. That was a difference of a hundred thousand. And then at the end of the day, the taxable income for the first couple was roughly $70,000, the other couple $175,000.

So, they converted an extra hundred thousand and they’re paying the end of the day $38,000 in taxes instead of $8,000. They converted an extra a hundred thousand, they paid an extra 30,000 in taxes, but you’re saying they still might be coming out ahead if stuff’s going up.

Bruce Hosler (16:51):

Well, just think of this, they only paid $30,000 on that a hundred thousand they converted. They guaranteed that it could never be 35% or 40% or 50%, which is what we’re fearful could happen in the future.

Now, I want to give an example (go to the next slide, Jon) of a couple that came in … a couple of weeks ago, Jason and I met with, and this last year, they just completed moving to tax-free altogether. Let’s look at their numbers on the next slide and show you what happened to them.

So, this couple is kind of the same numbers except that last year in 2024, they had a Roth conversion of $156,000 and their total income was $278,000, and their standard deduction was only $32,000. So, their taxable income was $244,000 and they had a total tax of $44,000. That was last year.

Now, in 2025, they have moved 100% all their IRAs to Roths and they also have life insurance retirement plans that they’ve set up. So, now, instead of any IRA distributions being taxable, they’re all Roth IRAs, all their pension and their Social Security income is the same.

But look what we did in the yellow, we gave them a distribution from their Roth IRA for $50,000 and we gave them a distribution withdrawal loan from their life insurance retirement plan for $50,000. So, we gave them a hundred thousand of tax-free income.

Their total income was $221,000, but the total taxable income was only $121,000 when they got through with their deductions and the senior deduction. Oh, by the way, because a hundred thousand of their income was tax-free, they got the full senior deduction. Now, their taxable income was only $75,000. Their tax was $9,000 compared to $44,000 last year.

This, folks, is why it’s going to be so important that you want to move to tax-free in the future when they’re going to be taxing everything in the future when a large portion of your money, including your Social Security doesn’t have to be taxed or not as taxed as much because you’ve moved to tax free. That’s how dramatic this can be. And this example illustrates that really well.

So, my final question here is, is there anything I need to do to take advantage of this new tax bill? And we had one other couple that came in and they had $150,000 left in their IRA. They had been converting and converting and converting, and they only had $150,000 left. And so, we’re looking at it and we’re saying, “Why would you convert all of that next year?”

If we split that up over the next three years and just convert $50,000 a year for the next three years, their income only came up to $120,000. They still qualified for this full senior deduction all three years and their income was lower, and they were still able to get their IRA converted to an all Roth in the next three years. So, my answer to this question is, it depends on your circumstances and if you have a big IRA Jason, what is our feeling for clients?

Jason Hosler (20:22):

Our feeling is still the same on the long-term. Then for those with a big IRA, we recommend the bracket strategy, using up the 24% bracket. The nuts and bolts of the math that you look at for the bottom-line benefit that this senior deduction provides versus the long-term planning and moving to tax-free — you’ve got a big IRA, you got to keep filling at least the 24% bracket if not more. We have some clients that we’ve advised they need to do more.

Now, we do have a number of clients that have been diligently moving to tax-free and they’ve gotten into that in between maybe $300,000 to $500,000 that they have left to move. There’s some interesting planning that could be done there, and how much you want to convert each year, still be able to move to tax-free and take advantage of this new senior deduction.

Bruce Hosler (21:16):

And Alex, as we’ve advised many clients, maybe they don’t have to move it all to tax-free. They can use some of the standard deduction to set off that RMD. Talk about that, Alex, you’ve seen us plan for that. How does that look?

Alex Koury (21:29):

Right, exactly. So, ideally, we want to get your tax deferred IRA down to a certain level in which when you take out your required minimum distribution, the amount of income you’re drawing off of your IRA is going to match close to or at what the standard deduction is.

And what happens there, that in itself is a tax-free move you can make to get money out of your IRA tax-free. But we need to get down to a certain level so that way your required minimum distributions don’t go significantly higher as you get older. And that’s typically what happens there.

So, we want to look at those levels over time to see exactly where you should be fitting in, and that also plays into your overall tax plan to make sure that you’re paying again, the lowest taxes possible at that amount after we do our conversions with you.

Bruce Hosler (22:17):

So, folks, to answer this question, is there anything you need to do? I would say if you have an IRA larger than $500,000 to a million dollars or greater, you probably need to have an aggressive plan on doing Roth conversions. If you’re somewhere below the $750,000, $500,000 range, now you need to look at strategically doing some Roth conversions but not too much, and maybe doing that strategically over the next four years.

As you can see in any one of these circumstances, my answer for you is you need to have a tax plan. You don’t know what you need to do to take advantage of this bill until you look at your individual situation.

So, we encourage you to get with us. If you have questions, let’s look at your tax planning for this year. But there’s some great opportunities to take care of the new senior deduction and try and keep your Social Security tax-free. I hope you found a lot of value in this today, and we look forward to visiting and answering any questions that you may have about this.

Jon Gay (23:16):

Well, the most important question, Bruce, if somebody watching or listening today wants to come talk to you and your team about this very topic, how do they best find you at Hosler Wealth Management?

Bruce Hosler (23:24):

Jason in Prescott, how do they get us?

Jason Hosler (23:27):

So, give us call (928)-778-7666.

Bruce Hosler (23:32):

Of course, you can get us on the web at hoslerwm.com. And Alex in Scottsdale, how can they reach you?

Alex Koury (23:39):

That’s right, you can call us at (480)-994-7342.

Jon Gay (23:45):

Really informative stuff today, gentlemen. Thanks very much. We’ll talk soon.

Bruce Hosler (23:47):

Thanks, Jon.

Jason Hosler (23:48):

Thanks, Jon.

Alex Koury (23:49):

Thanks, Jon.

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Disclosure: (23:50):

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