Retirees will see their Social Security payments increase by 2.8% in 2026 to account for inflation. Yet, this latest annual COLA could end up costing some retirees.
For those who do not currently pay federal income taxes on their Social Security benefits, the increase in Social Security income could cause their benefits to become taxable. For retirees who already pay taxes on their benefits, the extra income could cause their benefits to be taxed at a higher rate.
It all comes down to how the cost-of-living adjustment affects what the federal government calls your “combined income.”
Combined income
Whether Uncle Sam can tax your Social Security benefits is based in part on the amount of your combined income. This amount is defined as the sum of:
- Your adjusted gross income (AGI)
- Any nontaxable interest you earn
- One-half of your Social Security benefits
You can find these numbers on your latest federal income tax return, which will give you an idea of what they will be for 2026.
On federal returns, they are listed as “adjusted gross income,” “tax-exempt interest” and “Social Security benefits,” respectively. Just remember to divide the total benefits amount by 2, because the combined income formula only includes 50% of your benefits.
The extent to which benefits are taxed
If your benefits are taxable, your combined income is also a determining factor in the portion of your benefits that is subject to federal income taxes.
According to the Social Security Administration, you may owe taxes on up to 50% of your benefits if:
- You file a federal tax return as an individual, and your combined income is between $25,000 and $34,000.
- You file a joint return, and your household’s combined income is between $32,000 and $44,000.
You may owe taxes on up to 85% of your benefits if:
- You file an individual return, and your combined income is more than $34,000.
- You file a joint return, and your household’s combined income is more than $44,000.
Note that IRS Publication 915 contains worksheets to help you determine your taxable benefits exactly. Most likely, though, your tax software or tax professional computes this for you each year as part of the process of preparing your federal income tax return.
Why so many retirees owe taxes on their Social Security
According to the federal government, about 40% of Social Security recipients owe federal income taxes on their benefits.
But among retirees specifically, more like 50% owe taxes on their benefits, at least according to the Senior Citizens League. And the organization argues that that percentage is a lot higher than it should be.
Remember, the amount of your combined income isn’t the only factor that determines whether, or the extent to which, your Social Security benefits are taxable.
Another factor is the combined-income thresholds listed previously — such as $25,000 for individual tax return filers and $32,000 for joint filers. Those thresholds have not been adjusted to account for inflation since the federal income tax on Social Security benefits started in 1984.
As a result of the thresholds never changing, the tax affects more retirees than originally intended. As we have reported:
“Initially, less than 10% of Social Security recipients were expected to owe taxes on their benefits. Now, Uncle Sam is reaching into the pockets of about half of recipients.”
How to minimize taxes on your Social Security benefits
Retirees who can reduce their combined income can lower the rate at which Uncle Sam taxes their Social Security benefits — or avoid taxation of their benefits entirely.
This could be as simple as withdrawing slightly less money from your traditional retirement accounts and taxable investment accounts in 2026 to compensate for the 2.8% increase in your Social Security benefits. We detail several other methods in “7 Ways to Avoid Paying Taxes on Your Social Security Income.”
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