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The New Senior Deduction Under H.R. 1: What U.S. Citizens Living Abroad Need to Know

by Lance Morris
Aug 27, 2025

The New Senior Deduction Under H.R. 1: What U.S. Citizens Living Abroad Need to Know

For years, U.S. retirees, especially those living abroad have been caught between complex tax rules and campaign promises that never fully materialized.

One of Donald Trump’s key pledges was to eliminate federal income tax on Social Security benefits. While that promise was not fulfilled, the One Big Beautiful Bill Act (H.R. 1), signed into law on July 4, 2025, did introduce a form of relief: a temporary Senior Bonus Deduction.

Relief for U.S. Seniors Overseas

The new law allows taxpayers aged 65 or older to claim an additional deduction of $6,000 per individual or $12,000 for couples filing jointly, on top of the regular standard deduction.

  • The deduction applies for tax years 2025 through 2028.
  • It can be claimed regardless of whether you itemize.
  • It phases out gradually once Modified Adjusted Gross Income exceeds $75,000 (single) or $150,000 (joint) and disappears completely at $175,000 and $250,000 respectively.

This provision is especially relevant to U.S. citizens abroad, many of whom are still required to file U.S. tax returns despite living overseas.

In fact, more than 700,000 Americans currently receive Social Security benefits while residing outside the United States. These retirees remain fully eligible for the new deduction.

Correcting the Record

At first, the Social Security Administration (SSA) mistakenly claimed that this new deduction would eliminate federal tax on Social Security benefits for most seniors. This caused confusion among retirees, including those abroad. The SSA later clarified: the deduction reduces taxable income, but it does not exempt Social Security benefits from taxation.

Social Security Taxation Still Applies

For Americans abroad, Social Security is taxed the same way as for those living in the U.S. Up to 85% of benefits may be subject to tax, depending on income levels:

  • Below $25,000 combined income ($32,000 joint): Social Security not taxable.
  • $25,000–$34,000 combined income ($32,000–$44,000 joint): Up to 50% taxable.
  • Above $34,000 combined income ($44,000 joint): Up to 85% taxable.

Combined income = Adjusted Gross Income + nontaxable interest + ½ of Social Security benefits.

Once the taxable portion is calculated, it is included in ordinary income and taxed at the individual’s marginal U.S. rate (10%–37%).

Double Taxation Concerns Abroad

For U.S. citizens abroad, taxation of Social Security benefits can feel particularly burdensome because:

  • Australia, New Zealand, and many EU countries also tax Social Security-like pensions, meaning double taxation can arise.
  • The U.S.–Australia and U.S.–New Zealand tax treaties do not exempt U.S. Social Security from U.S. taxation; instead, credits must be used in the country of residence.
  • Other treaties (such as with the UK or Germany) assign primary taxing rights to the country of residence, reducing U.S. exposure.

The new Senior Deduction does not override treaties, but it does reduce U.S. taxable income, which can ease the global tax burden when coordinating foreign tax credits.

Practical Example

Imagine a U.S. citizen living in Spain, age 70, receiving $40,000 in Social Security and $20,000 in pension income:

  • Without the new law: up to 85% of Social Security (≈$34,000) plus $20,000 pension = $54,000 taxable income (before deductions).
  • With the Senior Deduction: The taxpayer reduces taxable income by $6,000, lowering the portion exposed to U.S. tax.
  • While modest, this can reduce U.S. liability by hundreds to over a thousand dollars annually, depending on bracket.

Bottom Line for U.S Expats

The Senior Bonus Deduction is not the elimination of Social Security taxation once promised, but it is meaningful relief. For U.S. citizens living abroad:

  • You remain eligible for this new deduction.
  • It applies in addition to the standard deduction.
  • It can reduce the U.S. taxable portion of your Social Security benefits.
  • It is temporary—available only through 2028.

Given the interplay of U.S. rules, foreign tax systems, and tax treaties, expats should carefully coordinate their U.S. return with local filings to maximize both the new deduction and foreign tax credits.