Your 2027 Social Security Raise May Come With a Tax Catch

A larger Social Security raise could be on the way in 2027, and it may not be worth quite as much as it first appears.

The Senior Citizens League expects the 2027 cost-of-living adjustment (COLA) to reach 3.8%, giving the average retired worker roughly $77 more each month if that estimate holds. At a time when prices have been climbing faster than recent adjustments have covered, the extra money is welcome.

The less obvious part is that a bigger monthly check can also increase the amount of Social Security that is subject to federal income tax. Knowing how that connection works is one of the easier ways to avoid money mistakes before the new rate takes effect.

What the 2027 COLA could look like

The final 2027 COLA will not be announced until October 2026 because Social Security bases the annual adjustment on inflation during July, August, and September. Early projections are based on what inflation has been doing so far this year.

The CPI-W, the price index Social Security uses for the COLA calculation, rose 4.4% year-over-year as of May 2026, driven mostly by energy and shelter costs.

If that pace holds through the summer, the 2027 COLA could come in anywhere from the high 3% range to 5%. For the average retired worker, a 3.8% COLA would increase the monthly benefit from about $2,026 to roughly $2,103 a month.

Why a bigger COLA can trigger higher taxes

Whether your Social Security benefits are taxed depends on a figure called combined income. It includes your adjusted gross income, any tax-exempt interest you receive, and half of your annual Social Security benefits. If that total crosses certain thresholds, a portion of your benefits becomes taxable.

For single filers, the first threshold is $25,000. Above that, up to 50% of Social Security benefits may be taxable. Once combined income exceeds $34,000, up to 85% of benefits may be taxable. For married couples filing jointly, those thresholds are $32,000 and $44,000.

Those numbers were set by Congress in 1983 and 1993 and have never been adjusted for inflation. As Social Security benefits rise with each COLA, more retirees cross those same thresholds even if their buying power hasn't improved.

How a larger COLA can push you over the tax threshold

Suppose you're single, receive $20,000 a year in Social Security benefits, and have $15,000 from other income. Together, those amounts put your combined income at $25,000, right where Social Security benefits can start becoming taxable.

A 3.8% COLA would raise your annual Social Security income to $20,760, pushing your combined income to $25,380. That is enough for part of your benefits to become subject to federal income tax.

One year's increase may not make much difference, but the same pattern can repeat each time your benefit rises while the income thresholds remain the same. Over time, more of your Social Security benefits can become taxable even if your buying power has barely changed.

Consider withholding before the tax bill arrives

If your combined income is getting close to the tax thresholds, planning ahead can make tax season much easier. One of the simplest options is to have federal income tax withheld from your Social Security check instead of paying a larger bill when you file your return.

The SSA lets you choose a withholding rate of 7%, 10%, 12%, or 22%, which spreads the cost across the year and removes the risk of an unwelcome tax bill the following April. It won't reduce the amount you owe, but it keeps the impact from showing up all at once.

The retirement income strategy that can reduce taxes

Paying attention to which accounts you draw from is one of the more effective ways to manage your combined income without changing how much you actually spend.

For example, qualified Roth IRA withdrawals are not included in the combined income calculation. Using those funds instead of taking more taxable income can sometimes help keep more of your Social Security benefits from becoming taxable.

If you have traditional IRA funds you haven't yet converted, a year when your income dips lower than usual is often a good window for a Roth conversion. Moving funds at a lower rate now means smaller taxable withdrawals later, when COLAs may have already pushed your combined income higher than you'd like.

Check your tax situation after every COLA announcement

Each October, after Social Security announces the next year's COLA, take a few minutes to see how the increase could affect your taxes. A quick review can show whether you're getting close to one of the income thresholds while there's still time to make adjustments before the year ends.

For some retirees, that could mean changing where they take retirement income from. Others who give to charity may benefit from a qualified charitable distribution (QCD), which lets eligible IRA owners give directly to a qualifying charity without adding that distribution to their taxable income.

Bottom line

A larger 2027 COLA would be welcome news for retirees who have felt the impact of higher prices over the past year. It is also a good time to check in on your retirement plan, especially if your combined income is already close to one of the tax thresholds.

After the official COLA is announced, run your combined income using the new benefit amount. A few minutes with your updated numbers can show whether the higher COLA pushes you into a different tax situation before it's too late to respond.