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 cost of medical care as they age.

Unfortunately, taxes may be among the expenses seniors have to cover as well. The IRS doesn’t necessarily stop taxing you just because you’re retired, and many seniors need to budget for both federal and state taxes.

This could become an issue, as a good number of retirees on Social Security potentially face a big surprise next year when their taxes end up higher than in the past. Here’s why retirees better be prepared for the IRS to potentially 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 IRS bills in 2027 for a simple reason. Benefits are likely to see a significant increase due to the COLA, but the threshold at which taxes kick in is not going to change.

In 2027, Social Security retirees could be looking at the fourth-largest Social Security Cost of Living Adjustment in 36 years. While we won’t know the specifics of the COLA until October, there are plenty of estimates out already, with the Senior Citizens League anticipating that the raise could total 3.9%, while independent Social Security and Medicare policy analyst Mary Johnson is projecting the raise will be even higher at 4.2%.

While a big raise is good news, it also puts more seniors at risk of being taxed on their Social Security benefits for the first time or paying a larger amount of tax than they did in the past. That’s because the thresholds at which benefits become taxable are not indexed to inflation, and do not increase just because benefits go higher. 

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

In the 1980s, lawmakers began charging tax on Social Security benefits for the first time to shore up the program’s finances (which were struggling).  An additional layer of taxes was then added in reforms in the 1990s.

When the legislation imposing these taxes was passed, only a small percentage of retirees actually ended up owing the IRS money because the income thresholds were set pretty high — for the time. 

But incomes have increased, and the thresholds have not.

Back when the taxes were put into place, you’d be taxed on up to 50% of benefits with an income between $25,000 and $34,000 if you were a single tax filer and would owe tax on up to 85% of benefits above that limit.  For married joint tax filers, the tax kicked in at $32,000, with the second threshold set at $44,000. 

Those thresholds have remained the same as they were back then. Now, this is provisional income, so half of all Social Security benefits plus all taxable and some non-taxable income. But it is still a pretty low amount of income. That’s why the Senior Citizens League now estimates around 50% of retirees pay at least some tax on their benefits.

That number is likely to grow with a big Social Security raise coming up next year. Retirees who are excited about seeing extra income in their checks should be prepared for new tax obligations if the COLA pushes them above the limit where benefits are taxed for the first time, or for their tax bill to increase if it pushes them higher above the thresholds.