Tax-Planning for the “Senior Bonus” Deduction

Tax-Planning for the “Senior Bonus” Deduction under the One Big Beautiful Bill

Overview

The One Big Beautiful Bill adds a new “senior bonus” deduction for taxpayers age 65 and older — up to $6,000 per person, on top of the standard or itemized deduction. The bonus phases out as income goes up:

• Full benefit up to $75,000 MAGI (single) or $150,000 (married filing jointly)
• Phases out at 6% of the amount above the threshold
• Fully eliminated at $175,000 MAGI (single) or $250,000 (joint)

This can create a planning opportunity by managing your modified adjusted gross income (MAGI) to stay in, or near, the “sweet spot” where you get an optimal deduction.

Step 1: Know Your AGI

Before you make any moves, it’s critical to project your AGI for the year (for most people, AGI and MAGI are very close). That means estimating:

• Earned income, pensions, RMDs, and IRA withdrawals
• Social Security
• Investment income — interest, dividends, capital gains
• Business or rental income
• other taxable income

The goal is to know whether you’re below the threshold, in the phaseout range, or above the cutoff. That determines whether you should add income strategically or find ways to reduce it.

Step 2: When Adding Income Can Help

It sounds odd, but sometimes it makes sense to increase income intentionally. If your AGI is well below the threshold, you may have room to add income without losing the bonus deduction.

Roth Conversions

You can use the deduction to offset part of the income from converting Traditional IRA dollars to a Roth. For example, if you’re $10,000 below the threshold, you can convert that amount without losing the bonus deduction.

Distributions If you’re already planning to take distributions, consider timing them for a year when your baseline AGI is lower. Adding income within the “buffer zone” can make those withdrawals more tax-efficient.

If you are under 65, you may take extra distributions to avoid increased AGI later when you’re eligible for this bonus deduction. Keep in mind the bonus deduction is only in place for 3 years.

Step 3: When Reducing Income Makes Sense

On the flip side, if you’re near the top of the phaseout range, every extra dollar chips away at the deduction. In those cases, it can pay to keep income down.

Tax Location Hold investments that get better tax treatment (qualified dividends and deferred growth) in your taxable accounts, and hold higher taxed investments (interest and high turnover) in tax-deferred and tax-free accounts.

Qualified Charitable Distributions (QCDs) If RMDs are increasing your income, and you’re charitably inclined, you can donate all or part of the RMD as a QCD, removing it from your income.

Deferring or Shifting Income If you can control when to take certain income —capital gains, IRA distributions — it may help to push those into a future year when you won’t lose the deduction. If you are working and eligible for retirement plan contributions, you can also use them to lower income in the current year.

Step 4: Putting It All Together

1. Check your baseline AGI. Are you below, inside, or above the phaseout?
2. Choose a strategy: Can you lower income to increase the deduction, or can you add income without reducing it?
3. Weigh tradeoffs. If you’re adding income, make sure the tax benefit from the deduction outweighs the extra tax. Project current vs future tax brackets.
4. Coordinate with other thresholds. Watch for IRMAA surcharges and tax bracket changes.