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Here’s how the House-passed tax bill would affect retirees

Social Security benefits are still taxed, but there’s a new tax deduction

Updated:

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Mark Huffman
Reporter

Mark Huffman has covered consumer issues since 2004, with a special focus on protecting and empowering older adults. A former news correspondent for the Associated Press Radio Network, Westwood One, and ConsumerAffairs, Mark brings decades of journalistic experience to RetirementLiving.com. He is passionate about giving consumers a voice and helping them make informed decisions. Mark has also created educational content, including Senior Scam Alert, a video resource designed to help seniors recognize and avoid fraud. He holds a B.A. from the University of Kentucky and lives with his family in Richmond, Virginia.

Key Insights

  • The bill increases the standard deduction by $4,000 for retirees 65 and older through 2028, eliminates federal income taxes on tips and overtime (benefiting part-time working retirees), and makes the 2017 tax cuts permanent, providing long-term tax planning stability.
  • Proposed $1.2 trillion in cuts to Medicare and Medicaid could result in reduced services and higher costs for seniors, while new Medicaid work requirements starting in 2026 may impact low-income retirees.
  • The bill blocks a rule requiring 24/7 registered nurses in nursing homes, potentially affecting care quality, but preserves the favorable annuity calculation method for federal retirees under the FERS system.

The “One Big Beautiful Bill Act” (H.R. 1), recently passed by the House of Representatives, introduces a series of tax reforms and spending adjustments that carry significant implications for retirees across the United States.

Things that benefit retirees:

  • Enhanced Standard Deduction: Retirees aged 65 and older will see an increase in the standard deduction by $4,000 through 2028. This adjustment aims to reduce taxable income for seniors, potentially lowering their overall tax burden.
  • Elimination of Taxes on Tips and Overtime: The bill removes federal income taxes on tips and overtime pay. While primarily benefiting active workers, this provision may also aid semi-retired individuals who continue to work part-time in service industries.
  • Extension of 2017 Tax Cuts: The legislation makes permanent several individual tax provisions from the 2017 Tax Cuts and Jobs Act, including reduced income tax rates across most brackets. This permanence provides long-term tax planning stability for retirees.

Healthcare and social program adjustments 

To offset the projected $3.8 trillion increase in the national deficit over the next decade, the bill includes significant reductions in federal spending. Notably, it proposes nearly $700 billion in Medicaid cuts and could trigger approximately $500 billion in automatic Medicare cuts between 2027 and 2034 due to statutory Pay-As-You-Go (PAYGO) rules. These cuts may lead to reduced services and higher out-of-pocket costs for seniors.

Starting in December 2026, able-bodied adults without dependents will be required to fulfill 80 hours per month in employment or community activities to maintain Medicaid eligibility. This change could affect low-income seniors who rely on Medicaid for healthcare coverage. 

The bill seeks to block a Biden-era rule mandating 24/7 registered nurse presence in nursing homes, potentially affecting the quality of care for residents, many of whom are elderly.

Federal retirement benefits

FERS Annuity Calculation: A proposed change to calculate the Federal Employees Retirement System (FERS) annuity based on the highest five years of salary instead of the highest three was removed from the final bill. This decision preserves the current calculation method, which is more favorable to federal retirees. 

While the “One Big Beautiful Bill Act” offers certain tax benefits to retirees, the potential reductions in Medicare and Medicaid funding raise concerns about the accessibility and affordability of healthcare for seniors. As the bill moves to the Senate, further deliberations and amendments are anticipated, which could alter its impact on the retiree population.

Retirees are encouraged to consult with financial advisors to understand how these changes may affect their circumstances and to plan accordingly for potential shifts in healthcare costs and tax liabilities.

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