Social Security ‘Bonus’: 6 Proven Strategies To Maximize Your Tax Savings
Written by
Andrew Lisa
Edited by
Cory Dudak
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Despite an underwhelming 2.8% COLA that probably won’t keep pace with inflation, Social Security recipients have something to look forward to in 2026. The One Big Beautiful Bill Act includes a temporary provision for a Social Security “bonus” that qualified beneficiaries will receive as a tax deduction through 2028.
This deduction gives Social Security recipients a golden opportunity to invest those savings to generate income and help them keep up with rising prices. Here’s how:
Determine Your Eligibility
The bonus provision applies whether you itemize or take the standard deduction, provided you meet the following qualifying criteria:
- It applies only to recipients ages 65 and older.
- The new deduction is worth up to $6,000 for individual filers or $12,000 for couples filing jointly, provided both spouses are at least 65.
- The deduction begins phasing out at $75,000 modified adjusted gross income (MAGI) for individuals and ends completely at $150,000, with partial deductions available in between. For married couples filing jointly, the thresholds are $175,000 and $250,000.
Calculate Your Likely Deduction, But Be Realistic
The new bonus is a deduction that can lower your taxable income, not a credit that reduces your tax bill or increases your refund on a dollar-for-dollar basis. While the deduction could make benefits tax-free for some, the legislation did not change how Social Security benefits are taxed.
With that in mind, temper your expectations when using your MAGI to calculate your likely deduction.
The Urban Institute and Brookings Institution Tax Policy Center contested several key assertions the Trump administration made in promoting the bill, namely that the provision will eliminate taxes on Social Security benefits for 90% of recipients. It concluded that most will see their taxes reduced, but not eliminated, and that those in the 60th to 80th income percentiles — with incomes between $80,000 and $130,000 — stand to benefit the most.
The average among them will see a $1,100 tax cut, or about 1% of their after-tax income. Also, singles earning less than $25,000 and couples earning less than $32,000 will join higher earners in receiving no benefit at all.
Invest the Bonus With Income in Mind
Whether you get more or less than those in the $1,100 sweet spot, any bonus offers an opportunity to buy income-generating investments to plug the gaps left by a lackluster COLA. Here are a few ways to consider:
- Dividend stocks and ETFs: According to Aspen Wealth Management, growth stocks tend to reinvest their profits into the company to expand, while dividend stocks return profits directly to shareholders through periodic distributions (typically quarterly). Choose large, stable companies with long histories of dividend growth, such as the Dividend Aristocrats, and high-quality dividend ETFs such as NOBL, SCHD and VIG.
- REITs and REIT ETFs: According to Schwab, real estate investment trusts (REITs) and the ETFs that group them into funds are required by law to pay 90% of their taxable income to shareholders as dividends. Additionally, they provide access to real estate investing without requiring the purchase of physical properties.
- Fixed-income securities: Instruments such as bonds and Treasuries offer unrivaled safety and security but yield lower returns.
- Diversify: According to Dividends.com, “best-in-class” dividend portfolios are diversified across sectors, especially distribution-focused segments such as healthcare, financials, energy and utilities.
- Avoid yield chasing: According to Morningstar, high yields are tempting, but oversized distributions — typically those over the high but healthy 4% to 6% range — are often a sign of fundamental trouble. This so-called dividend trap can lure investors into securities that are likely to lose value and slash their distributions.
- DRIP the dividends you don’t need to spend: Harvest only the dividends you need for ongoing income. Schedule the rest to purchase more shares automatically by engaging your brokerage’s dividend reinvestment plan (DRIP).
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