MML #036: The $46,700 Deduction Goldmine

If you’ve been with me the last few weeks, you know the new “Senior” deduction under the One Big Beautiful Bill is big news. But what you may not know is that it’s not guaranteed. 

Earn too much, and the IRS claws it back. 

And that’s why today we’re looking at how to stay in the sweet spot. Let’s dive in.

Understanding the Triple-Stack Advantage

For 2025, married couples filing jointly who are both 65 or older can claim:

• Standard deduction: $31,500
• Age 65+ additional deduction: $3,200
• NEW Senior bonus deduction: $12,000
• Total: $46,700

That's substantial tax shelter. 

But..

…the senior bonus deduction disappears if your modified adjusted gross income exceeds $150,000 for couples ($75,000 for singles), phasing out completely at $250,000 ($175,000 for singles).

Amazing that you could literally save thousands in taxes by earning just slightly less income than these thresholds.

The Golden Years Between Retirement and Required Minimum Distributions (RMDs)

If you retire at 62 but don't face required minimum distributions until 75, you have a 13-year window of maximum income control. This is when strategic planning really shines.

During these years, you decide exactly how much to withdraw from retirement accounts. Want to stay under $150,000 in income to preserve the full senior bonus deduction? Good chance you can make that happen if you have the write mix of assets. 

Consider drawing from taxable investment accounts first, where you'll pay capital gains rates (often lower than ordinary income) and can harvest losses to offset gains. This keeps your ordinary income lower while still providing the cash flow you need.

But once RMDs kick in, your control diminishes. Like we talked about last week, you can also introduce Roth Conversions here, filling up the lower tax brackets without bleeding over into higher ones. 

That's why these pre-RMD years are golden for income optimization.

Social Security Timing as a Tax Strategy

Here's something most people miss: when you claim Social Security affects how much of it gets taxed.

If you delay Social Security until age 70, you'll receive about 32% more in monthly benefits. But those higher payments might push you over the deduction phase-out thresholds.

Sometimes claiming Social Security earlier—even at a reduced benefit—keeps your total income low enough to preserve the senior bonus deduction. The tax savings might offset some of the reduction in Social Security benefits.

For example, a lawyer with substantial retirement savings might benefit from claiming Social Security at full retirement age while drawing minimally from traditional retirement accounts. This could preserve the deduction while maintaining needed cash flow.

The math gets personal quickly, as it all depends on your personal mix of accounts (Not to mention a spouse’s resources too)  but it's worth running the numbers both ways.

The Smart Withdrawal Sequence

When you need retirement income, the order matters more than ever. Here's the framework I use with clients:

When trying to keep taxable income low:

Start with taxable accounts. Sounds counterintuitive, but you'll pay capital gains rates, can harvest losses, and these withdrawals don't count as ordinary income for deduction phase-outs. Plus, you maintain flexibility since there are no required distributions.

Next, consider Roth IRAs. These withdrawals are tax-free and don't affect your modified adjusted gross income at all. Pure income without the tax consequences. And unlike traditional IRAs, original Roth contributions can be withdrawn penalty-free at any age (That’s right, even before Age 59 ½)..

Save traditional IRAs and 401(k)s for last (until RMDs force your hand). Every dollar you withdraw counts as ordinary income and pushes you closer to those phase-out thresholds.

When trying to increase taxable income:

Essentially, reverse the process. 

I know what you’re thinking. Why would anyone want to increase their taxable income? 

The simple answer is that today’s rates may be more favorable than projected rates down the road when considering asset growth and required distribution timelines.

Effective estate planning can also shift income into your lifetime, reducing the tax burden your beneficiaries may face later. But the right approach depends on your purpose. 

The numbers matter, but intent matters more. Maximizing tax savings or boosting lifetime income won’t mean much if it doesn’t actually move you closer to your true goals.

Managing Partnership Income and Consulting Work

Many lawyers continue earning some income in retirement through partnerships or consulting. This creates both opportunity and complexity.

You might time partnership distributions or consulting payments to smooth income across multiple years. Instead of taking a large distribution in one year that pushes you over the threshold, consider spreading it across two or three years.

Some partnerships allow flexibility in when K-1 income gets recognized. If yours does, coordinate with your tax professional to optimize the timing.

Understanding the Phase-Out Mechanics

The senior bonus deduction doesn't disappear overnight—it phases out gradually starting at $150,000 of modified adjusted gross income for married couples ($75,000 for singles). For every dollar you earn above these thresholds, you lose 6 cents of the deduction.

This means a married couple earning $151,000 would lose $60 of their $12,000 senior bonus deduction ($1,000 over the threshold × 6 cents = $60). The deduction gets completely eliminated only when your income reaches $250,000 for couples ($175,000 for singles).

Another important note here is that this “Senior Deduction” isn’t permanent. At least for now, it is set to expire after 2028. One may surmise that these few years are a trial run with the ultimate intent of becoming a permanent change, but the reality is you may have just four tax years to maximize this deduction before it disappears entirely. 

That timeline creates both opportunity and urgency for strategic income planning during these peak benefit years.

Key Takeaways

The new senior bonus deduction creates real tax savings, but only if you plan around the income limits. 

The biggest mistake I see is people discovering these opportunities at tax time instead of planning for them throughout the year. 

Monitor your income, time your withdrawals strategically, and remember that this enhanced deduction disappears after 2028. Four years goes by faster than you think.