While a campaign promise by President Donald Trump to eliminate income taxes on Social Security benefit income was not fulfilled, seniors were granted certain relief. The landmark tax legislation, the One Big Beautiful Bill Act (H.R. 1), signed into law on July 4, 2025 introduced a temporary special deduction for taxpayers aged 65 or older.
The Social Security Administration initially misstated the impact of the new senior deduction. It had incorrectly suggested that the new deduction would eliminate federal income tax on Social Security benefits for most recipients. This statement was later quietly corrected to clarify that the deduction reduces taxable income but does not exempt Social Security from taxation.
The new law permits certain older taxpayers to deduct up to $6,000 per individual, or $12,000 for married couples filing jointly. This senior bonus deduction is in addition to the standard deduction, applying for tax years 2025 through 2028, regardless of whether the taxpayer itemizes deductions. The deduction gradually phases out at a rate of 6% of the amount by which Modified Adjusted Gross Income exceeds $75,000 for single filers and $150,000 for joint filers reducing by $60 for every $1,000 above those thresholds. The deduction disappears entirely once income reaches $175,000 for single filers and $250,000 for joint filers
U.S. Seniors Abroad: Eligible for the Senior Deduction
Many American retirees choose to spend their later years abroad and the trend is gaining momentum. Last year over 700,000 U.S. citizens were receiving Social Security benefits while residing overseas. Americans receiving such benefits overseas are often still required to file U.S. tax returns if their income exceeds filing thresholds. These overseas retirees are eligible for the new senior deduction.
Up to a maximum of 85% of U.S. Social Security benefits may be taxed, regardless if the recipient is a U.S. citizen/resident or foreign national who is nonresident. A special taxation formula applies to Social Security benefits for U.S. citizens and residents to determine what portion of the benefits may be taxed. The tax rate applied to this taxable portion is the individual’s marginal U.S. tax rate commencing at 10% to a maximum 37%. The taxation formula depends on the U.S. taxpayer’s combined income:
- If combined income (including half of Social Security benefits, adjusted gross income, and tax-exempt interest) is below $25,000 ($32,000 for married joint filers), Social Security benefits are not taxable.
- If combined income falls between $25,000 and $34,000 ($32,000 to $44,000 for joint filers), up to 50% of Social Security benefits may be taxable.
- If combined income exceeds $34,000 ($44,000 for joint filers), up to 85% of Social Security benefits may be subject to tax.
Under the OBBBA, seniors will be eligible to claim the senior deduction commencing tax year 2025, provided they meet the age, MAGI, and filing criteria. It is important to note that the OBBBA doesn’t eliminate taxes on Social Security benefits. It provides an entirely new deduction of $6,000 ($12,000 for joint filers) for taxpayers aged 65 or older by December 31 of the tax year, whether they’re receiving Social Security benefits or not. This additional deduction may result in no tax liability for many seniors.
Foreign Nationals Abroad: A Disparate Tax Treatment On Social Security Benefits
Retirements are becoming more global. Foreign individuals working in America may have paid into the U.S. Social Security system for decades. They may later return to their home countries and no longer have U.S. tax status, becoming nonresident aliens for U.S. income tax purposes. NRAs are subject to a withholding tax regime on items of U.S.-source income, including U.S. Social Security benefits, with the general withholding tax rate of 30% (unless the rate is reduced by a relevant tax treaty).
In sharp contrast to the U.S. individual, NRAs collecting U.S. Social Security while living abroad face a much harsher tax burden under the withholding tax regime. This often comes as an unwelcome surprise for those seniors who have not anticipated the tax effects on their Social Security payments.
The U.S. imposes a flat 30% withholding tax on 85% of the Social Security benefits paid to NRAs, resulting in an effective tax rate of 25.5%. Unlike U.S. citizens and residents, NRAs cannot offset this withholding by claiming deductions or lower marginal tax rates. While some tax treaties eliminate U.S. tax or reduce the withholding rate on such benefits, many countries have no such agreements with America.
Social Security And The Gap in Tax Fairness
Both U.S. seniors abroad and foreign nationals abroad who are NRAs often depend nearly entirely on Social Security income. Both groups contributed equally to the Social Security system. Yet only U.S. citizens or residents can reduce or eliminate their tax burden via tax deductions including the new OBBBA age-based deduction. NRAs receive no such relief. The current law draws a stark divide: one group benefits; the other does not.
Taxation of Social Security: Reform Ideas for Greater Equity
To bring parity, there are various possible measures that Congress could consider. One possibility might be to permit low-income NRAs to opt into U.S. tax reporting and progressive tax brackets instead of mandatory flat withholding. Another could be extending a senior or low-income deduction for foreign Social Security recipients living abroad that is similar to the senior deduction granted by the OBBBA.
Final Word
The One Big Beautiful Bill Act introduces a temporary (4 tax years, unless extended by a future Congress) yet significant deduction for aging Americans. For older U.S. persons living stateside or living abroad, this means the potential of zero federal income tax. For foreign nationals abroad, however, who paid into the same Social Security system, the current status quo for NRAs means 30% withholding and no access to any deductions, including the new senior deduction.
Both U.S. and foreign nationals have contributed to the U.S. Social Security system through decades of work and payroll taxation, yet only American citizens and residents benefit from the new senior deduction. The new OBBBA provision clearly provides meaningful relief to many American seniors through the special deduction. However, it leaves untouched the longstanding 30% withholding tax imposed on NRAs receiving U.S. Social Security benefits. Since the OBBBA did not address this issue, the significant disparity in how income earned through equal payroll tax contributions continues, with taxation being based solely on citizenship or residency status.
Posted August 1, 2025
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First published on Forbes July 27, 2025
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