No Tax on Social Security Benefits? Not Quite. Some Federal Retirees will Still Pay Taxes on Social Security

Taxes on social security has gained significant attention after the passage of the big beautiful bill, which promised to eliminate federal income taxes on social security benefits. While it does provide tax relief to millions, many who receive social security benefits will still have the burden of income taxes, including federal retirees and employees at 62 years of age or older. The introduction of new deductions and provisions will reduce the tax burden on benefits for some, redefining the financial landscape for many seniors. 

Who Could Still Pay Tax on Social Security Benefits after Big Beautiful Bill Passes

The package provides senior citizens 65 and older, including federal retirees, with a $6,000 deduction on their federal income taxes from 2025 to 2028. Joint filers will receive double that amount. The benefit phases out for single taxpayers with incomes exceeding $75,000 and married couples with annual earned income above $150,000. Those earning over $175,000 individually and couples making more than $250,000 are ineligible for the deduction, meaning they may still have t pay federal income taxes on their benefits from the social security administration.

Breaking Down who Could Still Have to Pay Taxes on their Benefits 

Looking at how social security retirement income is taxed, the most that can be taxable is 85%. For single filers with an total gross income of $34,000 or lower, but more than $25,000, half of social security benefits were subject to taxes. Same goes for married couple with an income range between $32,000 and $43,999. These individuals will likely no longer pay federal income taxes on those benefits as the new $6000 senior deduction will cover the amount due. If a single filer makes between $34,000 and $75,000, or joint filers with an adjusted gross income between $44,000 and $150,000, they will get the full enhanced deduction and will probably not have to pay the tax on 85 percent of their retirement benefits. Above that amount, the deduction will phase out, and ultimately, 88% of older adults over age 64 will not have to pay any taxes on their benefits. 12% will still pay taxes on their social security income. 

Guide for Social Security Beneficiaries: States in which Social Security Benefits are Taxed

Social security benefits serve as a crucial source of income for many seniors aged 65 and older. However, the taxation of these benefits can vary significantly depending on the state in which a beneficiary resides. While some states eliminate taxes on social security, others impose state income taxes, affecting the financial well-being of social security recipients.

Federal Tax Considerations: Long-Awaited Tax Relief to Millions

In recent discussions, there has been a promise to protect social security and help ensure that seniors can better enjoy their benefits without the burden of excessive taxes. The recent passage of the “one big beautiful bill” sought to provide much-needed relief to millions of older Americans, but did not completely eliminate taxes completely as around 12% of seniors will still owe taxes on their social security income. 

States That Tax Social Security Benefits

As of 2025, there are a handful of states that impose taxes on social security benefits. These include:

• California: Offers a standard deduction but taxes social security benefits based on income levels.
• New Mexico: Taxes benefits but provides a senior deduction to lower the tax burden on older adults.
• Vermont: Taxes social security benefits for higher-income seniors, despite some tax relief measures.
• Connecticut: Imposes taxes on social security benefits, but offers an enhanced deduction for seniors.
• New Jersey: Taxes social security benefits, with certain exemptions for lower-income seniors.

These states differ in how they calculate the tax burden on benefits, often considering the modified adjusted gross income of the recipients. As discussions around tax reform continue, beneficiaries should stay informed about potential changes that could affect their income.

Social Security Help for Federal Employees and Retirees

Social Security is a crucial program that provides financial support for retirees receiving a pension from FERS (Federal Employees Retirement System) and active federal employees older than 62. Meeting with a financial planner that specializes in federal benefits can help beneficiaries understand their retirement income, including the taxes on benefits.

Meet with a fiduciary retirement planner today. 

Retirement Income Under FERS

FERS provides a three-part retirement package:

• FERS Basic Benefit: A monthly pension based on years of service and high-3 average salary.
• Thrift Savings Plan (TSP): A 401(k)-style account with government matching.
• Social Security: Standard benefits based on lifetime earnings.

Unlike the older CSRS system, FERS employees pay into Social Security throughout their careers, making them fully eligible for benefits upon retirement.

Federal Retirement: Social Security Eligibility & Timing

• Eligibility: Most FERS retirees qualify for Social Security after earning 40 credits (about 10 years of work).
• Claiming Age: Benefits can start at age 62 (reduced), full retirement age (66–67), or be delayed to age 70 for maximum payout.
• Supplement: If you retire before age 62, you may receive a Special Retirement Supplement that mimics Social Security until you reach eligibility.

For many federal retirees, Social Security makes up about one-third of total retirement income with the average monthly Social Security benefit in 2025 is $1,976, which is roughly 150% of the federal poverty level. Social Security is especially vital for those with modest TSP balances or shorter federal careers.

Future Outlook & Reform of Social Security Program

The Social Security Trust Fund is projected to be depleted by 2033, after which only 77% of scheduled benefits would be payable unless Congress acts.

Proposed reforms include:

• • Raising the payroll tax cap (currently $176,100)
  • Gradually increasing the FICA tax rate and amount of income
  • Adjusting benefit formulas for high earners

Despite concerns, Social Security is not going bankrupt, but benefit reductions are possible without legislative changes.

Strategic Tips for FERS Retirees

• Coordinate withdrawals from TSP and Social Security to optimize tax efficiency.
• Consider delaying Social Security to increase lifetime benefits—especially if you have other income sources.
• Use break-even analysis to decide when to claim benefits based on life expectancy and spousal needs.

Attend a free holistic federal benefits webinar – Register Now for an Online FERS Seminar