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Inflation is a double-edged sword for retirees. Cost-of-living increases will bump up Social Security payments next year. But some could face tax (or more tax) on those bigger benefits.
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Retirees and those close to the age they can collect Social Security received two pieces of bad news this week.
The first was word yesterday, June 9, from the Social Security and Medicare trustees that those federal retirement programs upon which millions of older Americans rely are in bigger fiscal trouble than ever.
The Social Security trustees’ 2026 report projects that the trust fund for monthly benefits will run low on money beginning in 2032. The Medicare trustees’ analysis warned that the federal health care’s hospital trust fund, popularly known as Part A, will be able to pay its bills only until 2033.
Then today, June 10, the Bureau of Labor Statistics announced that the consumer price index jumped 4.2 percent in May. That’s the biggest annual increase since April 2023.
Double whammy potential for aging Americans: While all consumers regardless of age are adversely affected by rising inflation, the higher prices pose special challenges to those already relying on or close to receiving federal benefits .
The Transamerica Center for Retirement Studies report issued in August 2025 found 91 percent of retirees count Social Security as a source of income, and 53 percent say it is their primary source of paying for, well, everything.
When the cost of living goes up, and retirement benefits are cut, these older beneficiaries are going to find it especially difficult to make ends meet.
One temporary inflationary plus: The one tiny silver lining comes from the inflation front. The increased costs likely will provide short-term relief to retirees.
Social Security beneficiaries received a 2.8 percent boost at the start of 2026.
If inflation stays high, some advisers say the 2027 cost-of-living (COLA) adjustment could be between 3.8 percent (the most agreed upon level right now) and 4.7 percent (the extreme amount if the Iran war continues).
But any increase could create new problems for some recipients. They could face, you guessed it, unexpected or more taxes on their larger benefits.
When tax is due on Social Security: If Social Security is your sole source of retirement income, Uncle Sam leaves it alone. Those payments are tax-exempt.
But if you have (or are) saving and/or investing or have a post-retirement job to supplement your federal retirement benefits, your annual Social Security amount is partially taxable.
Partially actually is substantial. Either 50 percent or 85 percent of Social Security benefits are taxed depending on your total, including your federal benefits, reach a certain level.
And inflation comes into play here, too, because it is not a factor.
Figuring how much to tax: To determine how much of your Social Security is taxable, start with the Form SSA-1099, Social Security Benefit Statement, you got in January. It shows the amount of benefits you received (box 5) in the previous year.
Then add one-half of your year’s Social Security to any other income — your adjusted gross income that includes taxable pensions, wages, interest and dividends — along with any tax-exempt interest income you received.
This sum is your combined income for Social Security taxation purposes.
If your combined income is more than a base amount based on your filing status, you’re going to owe tax on half or 85 percent of your benefits.
Base incomes determine taxable percentages: Taxpayers who file as an individual — this includes the single, head of household and qualifying widow(er) filing statuses — and your combined income is between $25,000 and $34,000, the Internal Revenue Service generally requires you pay tax on up to 50 percent of your Social Security benefits.
When your combined income is more than $34,000 as a single taxpayers, up to 85 percent of your Social Security benefits are taxable.
The income trigger is a bit bigger for married couples who file a joint tax return.
Tax is assessed on 50 percent of Social Security payments when married spouses have a combined income between $32,000 and $44,000.
Joint filers with income of more than $44,000 will see up to 85 percent of Social Security benefits subject to income tax.
Finally, married couples who file separate 1040s must take another factor into account when calculating potential tax on Social Security benefits.
Where the two-return filing spouses did not live together at any time during the tax year, they face the same base amount income triggers as individual filers. Again, that’s $25,000 to $34,000 for a tax on 50 percent of Social Security, and 85 percent taxable for earnings of more than $34,000.
If, however, married spouses lived together at any time during the tax year but just didn’t want to file a joint return, the base amount that triggers Social Security tax is zilch. That’s right, up to 85 percent of any combined income that’s more than zero dollars is taxable.
Inflation’s added tax cost: And here’s where inflation doesn’t help retirees.
The base earnings amounts that determine whether you owe tax on 50 percent or 85 percent of your Social Security benefits are permanently fixed.
So, every year that inflation triggers a Social Security COLA increase, when your total income also goes up so does the possibility that the U.S. Treasury will collect more on your federal benefits.
Thanks to this stealth tax, more Social Security recipients over time find themselves facing tax (or more tax) on more of their benefits.
That’s another cost to deal with as their purchasing power at best remains static or at worst decreases due to inflation elsewhere.
Final calculations, possible withholding: You’ll find out how much tax you’ll owe on your Social Security when you or your tax preparer plug the numbers into the annual return filing software.
The IRS also has an online interactive tool that can help you figure out if your federal retirement benefits are taxable and if so, just how much.
If you find you will owe tax on Social Security, you have two ways to avoid (or reduce) a tax bill at when your file when you file your return.
You can make estimated tax payments. Or you can have taxes withheld from your Social Security payments.
With the withholding route, you can choose to have 7 percent, 10 percent, 12 percent or 22 percent of your total benefits payment withheld. Just complete Form W-4V, Voluntary Withholding Request, and file it with the Social Security Administration (SSA).
You read that right. The W-4V goes to the SSA, not the IRS.
The easiest way to set up your Social Security withholding is to open an online account with the SSA. There you can go to the Voluntary Tax Withholding Request page and let the agency how much you want withheld. It will take effect with the next benefits payment period.
In the meantime, key an eye on inflation reports. They’ll give you an idea of whether you’re likely to get a larger-than-usual Social Security COLA increase. If that happens, then be ready to deal with any tax consequences of the added benefits.
You also might find these items of interest:
- 6 reasons married couples should file joint tax returns
- Tax inflation changes for 2026: Part 1 – Wider Tax Brackets
- Proposed new Social Security COLA CPI, wage base cap phaseout
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