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 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 a real surprise when they file in 2027. Here is why retirees need to be prepared for the IRS to take a bigger cut of their Social Security benefits in the coming year.
Retirees could be on track for an unpleasant tax surprise
Retirees collecting Social Security benefits could end up surprised by their 2027 IRS bills for a straightforward reason. Benefits are on track for a significant increase due to the annual cost-of-living adjustment (COLA), but the income thresholds at which taxes kick in are not moving at all.
While the official 2027 COLA will not be announced until October, early estimates are already running well above this year’s 2.8% increase. The Senior Citizens League, tracking May 2026 inflation data, is now projecting the 2027 COLA at 3.8%. Independent Social Security and Medicare policy analyst Mary Johnson, using April CPI-W data, has put her estimate even higher at 4.2%. Both figures remain subject to revision as five more months of inflation data come in before the Social Security Administration finalizes the number. The current average monthly benefit for retired workers is $2,026, meaning a 3.8% raise would add roughly $77 to monthly checks.
A meaningful raise is welcome news for seniors who have watched their purchasing power erode. A 2026 Senior Citizens League study found that Social Security benefits have lost roughly 13.7% of their buying power since 2010. But a larger check also puts more retirees at risk of owing federal tax on their benefits for the first time, or of seeing their 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 was passed, only about 10% of beneficiary families were affected, because the income thresholds were set high relative to what most retirees earned at the time. The 1993 law added an upper tier but left those same frozen thresholds in place for the lower tier.
Under the rules that remain 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 lower threshold is $32,000 and the upper threshold is $44,000. Provisional income is calculated as half of all Social Security benefits plus all taxable income and 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 COLA of 3.8% to 4.2% in 2027 would push more retirees across those lines for the first time, and lift others who already pay taxes into a higher taxable share of benefits.
A partial offset worth knowing about
There is one recent development that could soften the tax impact for some retirees. The tax legislation signed in 2025, often called the One Big Beautiful Bill, added a temporary bonus deduction of $6,000 per person for taxpayers age 65 and older. The deduction is available for tax years 2025 through 2028 and phases out for those with modified adjusted gross income above $75,000 (or $150,000 for joint filers). It does not change the Social Security taxation thresholds, but for lower-income retirees who rely heavily on Social Security, it can reduce overall taxable income enough to offset some or all of the COLA-driven tax increase. Retirees close to the provisional income thresholds should factor this new deduction into their planning before making assumptions about what they will owe in 2027.
Editor’s note: This article has been updated to reflect the Senior Citizens League’s latest 2027 COLA estimate of 3.8% (revised down from 3.9% based on May 2026 CPI data), the current average monthly benefit of $2,026 for retired workers, the historical detail that Social Security taxation began with the Social Security Amendments of 1983 rather than vaguely in “the 1980s,” and the temporary $6,000 senior bonus deduction introduced by the 2025 tax legislation that may reduce federal tax exposure for some retirees through 2028.
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