Retirees Could Face a Surprise Social Security Tax Hit in 2027

Retirees have a lot of things to spend their money on, from travel and spoiling the grandkids to covering the rising cost of medical care as they age.

Unfortunately, taxes are likely to remain a stubborn line item in that budget. The IRS does not stop taxing you just because you have retired, and many seniors must plan for both federal and state obligations on top of every other expense in retirement.

That tax burden may grow for a good number of retirees on Social Security, who could face an unwelcome surprise when they file in 2027. Here is why seniors need to be prepared for the IRS to claim a bigger share of their benefits in the coming year.

Retirees could be on track for an unpleasant tax surprise

Retirees collecting Social Security benefits could end up blindsided by their 2027 IRS bills for a straightforward reason. Benefits are on track for a meaningful increase thanks to the annual cost-of-living adjustment (COLA), but the income thresholds at which taxes kick in are frozen in place and will not budge.

The official 2027 COLA will not be announced until October 14, when the Social Security Administration releases the September CPI data and the final number simultaneously. With two of the three calculation months now in the books, the major forecasters have largely converged. The Senior Citizens League (TSCL) now projects a 3.5% COLA, and independent analyst Mary Johnson matches that estimate. AARP lands slightly higher at 3.6%. All three figures could still shift modestly depending on how September inflation prints. If either estimate proves accurate, the 2027 increase would be the largest Social Security COLA since the 8.7% adjustment that took effect in 2023. The current average monthly benefit for retired workers is approximately $2,086, meaning a 3.5% raise would add roughly $73 to monthly checks.

A meaningful raise is welcome news for seniors who have watched their purchasing power erode. The Senior Citizens League’s 2026 Loss of Buying Power report found that Social Security benefits have lost roughly 13.7% of their buying power since 2016. But a larger check also puts more retirees at risk of owing federal tax on their benefits for the first time, or of seeing an existing tax bill climb. That is because the thresholds at which benefits become taxable are not indexed to inflation and do not rise just because benefits go higher.

Here’s why you may owe the IRS more money in 2027

Social Security benefits were entirely exempt from federal income tax for the first four decades of the program. That changed with the Social Security Amendments of 1983, which for the first time allowed the IRS to include a portion of benefits in taxable income. A second, higher layer of taxation followed in the Omnibus Budget Reconciliation Act of 1993.

When the 1983 law passed, only about 10% of beneficiary families were affected. The income thresholds had been set high enough relative to what most retirees earned at the time that few crossed them. The 1993 law added an upper tier at a higher income level but left those same lower-tier thresholds frozen in place.

Under the rules in effect today, a single filer with provisional income between $25,000 and $34,000 can owe tax on up to 50% of benefits. Above $34,000, up to 85% of benefits becomes taxable. For married couples filing jointly, the equivalent thresholds are $32,000 and $44,000. Provisional income is calculated as half of all Social Security benefits, plus all other taxable income, plus certain non-taxable income such as tax-exempt bond interest.

Those thresholds have never been adjusted for inflation since they were set more than 40 years ago. As wages and annual cost-of-living adjustments have pushed retiree incomes steadily higher, the share of beneficiaries crossing those lines has climbed sharply. Roughly half of Social Security recipients now owe at least some federal tax on their benefits, compared with just 10% when the law took effect. A projected 2027 COLA of 3.5% to 3.6% would push more retirees across those lines for the first time, and pull others who already pay taxes into a higher taxable share of their benefits.

A partial offset worth knowing about

One recent development could soften the tax impact for some retirees. The One Big Beautiful Bill Act, signed into law on July 4, 2025, created a temporary bonus deduction of $6,000 per person for taxpayers age 65 and older, available for tax years 2025 through 2028. Married couples where both spouses qualify can claim up to $12,000 combined. The deduction phases out for those with modified adjusted gross income above $75,000 for single filers, or above $150,000 for joint filers. It can be claimed on top of the standard deduction, not just by those who itemize.

Notably, President Trump had campaigned on eliminating federal taxes on Social Security benefits entirely, but that provision was not included in the final law. Under Senate reconciliation rules, a direct cut to Social Security taxation required 60 votes that Republicans could not reach. The senior deduction was designed as a practical substitute. According to the Senate Finance Committee, the combined deduction changes mean that roughly 88% of seniors receiving Social Security income will pay no federal tax on those benefits.

The new deduction does not change the Social Security taxation thresholds themselves. For lower-income retirees who rely heavily on benefits, however, it can reduce overall taxable income enough to offset some or all of a COLA-driven tax increase. Retirees near the provisional income thresholds should factor this deduction into their planning well before drawing conclusions about what they will owe in 2027.

Editor’s note: COLA projections have been updated to reflect September 2026 estimates based on August CPI data, with TSCL and Mary Johnson each at 3.5% and AARP at 3.6%. The average monthly benefit figure has been updated to approximately $2,086 per the SSA’s July 2026 Monthly Statistical Snapshot. Context has been added on the legislative background of the One Big Beautiful Bill Act’s senior deduction, including the Senate Finance Committee’s estimate that 88% of seniors on Social Security would owe no federal tax on benefits under the new rules.

Contact [email protected] for any questions or corrections.