We won’t know the official 2027 Social Security cost-of-living adjustment (COLA) until October, but right now, all signs point to an above-average increase. While many seniors see this as good news, the reality is a bit more complicated.
Larger COLAs tend to accompany high inflation, so extra money usually goes toward rising living costs. It could also have unexpected tax consequences.
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How your Social Security COLA can affect your taxes
Your Social Security COLA increases your monthly benefits by a specific percentage. The latest 2027 COLA projection from The Senior Citizens League (TSCL) estimates that next year’s COLA will come in at around 3.9%. This would add about $81 to the average $2,081 Social Security benefit as of April 2026.
Those extra benefits will raise your provisional income. This is a combination of your adjusted gross income (AGI), plus any nontaxable interest you have from municipal bonds, and half your annual Social Security benefits. The government uses this metric, along with your marital status, to decide how much of your benefits you’ll owe federal income taxes on. The following table breaks down what percentage of your benefits could be taxable:
Marital Status
0% of Benefits Taxable If Provisional Income Is Below:
Up to 50% of Benefits Taxable If Provisional Income Is Between:
Up to 85% of Benefits Taxable If Provisional Income Exceeds:
Single
$25,000
$25,000 and $34,000
$34,000
Married
$32,000
$32,000 and $44,000
$44,000
Source: Social Security Administration.
This doesn’t mean you could lose up to 85% of your benefits. It means you could owe ordinary income taxes — anywhere from 10% to 37%, depending on your other taxable income — on up to 85% of your checks. This could increase your tax bill, and it may even bump you up into the next tax bracket.
That doesn’t always mean you’ll actually receive a bill, though. If you normally get a tax refund, you may just get a smaller one when you file your 2027 tax return. But that’s still not ideal.
What you can do about the COLA’s effect on your taxes
You may be able to offset the 2027 Social Security COLA’s effect on your tax bill by reducing your withdrawals from tax-deferred retirement accounts. This will reduce your AGI, lowering your provisional income and potentially reducing the percentage of your benefits that are taxable.
However, with living costs rising, it may not be possible to keep your spending low enough to avoid benefit taxes. In that case, you may need a plan to address these taxes so they don’t catch you off guard when you file your return.
You can set aside money for taxes on your own, or you can request that the Social Security Administration withhold money from your checks upfront for taxes. If you choose the latter, any excess withheld will come back as part of your refund. Consult an accountant if you’re not sure what your best move is.
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A Big 2027 Social Security Cost-of-Living Adjustment (COLA) Could Be Coming. Here’s How It Could Affect Your Taxes. was originally published by The Motley Fool
