October is an important month for older Americans.
Medicare enrollment opens tomorrow, Oct. 15.
Today, Oct. 14, Social Security recipients learned that their monthly federal retirement benefits will go up 3.6 percent in 2027. Supplemental Security Income (SSI) payments will see the same percentage increase next year.
That Social Security Administration (SSA) cost-of-living (COLA) announcement also affects those who are still working.
The 2027 figures released today include a bump in the Social Security wage base.
And, of course, there are plenty of tax implications for everyone, be they working, retired, or working during retirement.
Wage base and workers’ taxes: Let’s start with the change that will affect some who will still be working next year.
The wage base is the maximum earnings that are subject to the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax.
This is the 6.2 percent tax on earnings up to the wage base amount that is paid by both workers and employers. The combined 12.4 percent tax payments go into the Social Security trust fund, which pays for eventual retiree benefits.
In 2027, the amount of earnings subject to this tax will go from the current $184,500 to $192,300.
Those of us who don’t make that much won’t see any difference in our paychecks. But higher income earners will pay more in 2027 to support Uncle Sam’s retirement and disability programs.
Below are the calculations, both for 2026 and 2025 for comparison purposes, of the practical tax effects of the Social Security wage base on the amount taken out for the federal retirement benefits.
Payroll taxes in 2026 and 2027: Let’s start with this year’s amount, since we’re still paying tax on our 2026 earnings.
If you make up to or more than $184,500 in 2026, your annual Social Security out-of-pocket, or more precisely out-of-paycheck, tax amount will be at most $11,439. The math calculation is $184,500 x 6.2 percent.
Again, that $11,439 is also paid by your employer.
Next year’s larger Social Security wage base means that higher income earners will be paying more.
In 2027, the 6.2 percent tax will apply to earnings up to $192,300. That means these workers will pay a potential maximum FICA tax of $11,923.
That math is $192,300 x 6.2 percent. And yes, that’s rounded up from the exact $11,922.60 per Internal Revenue Service protocol.
And yes again, your boss pays the $11,923 on your earnings, too.
But there is good news for those who with really big salaries. Their wages in excess of $184,500 this year and $192,300 in 2027 are Social Security tax free.
That’s why some tax policy groups and lawmakers advocate increasing the Social Security wage base even more via a law change rather than by the annual COLA adjustment. Some want to eliminate it altogether.
The added taxes from such a change, they argue, would solve the Social Security’s financial problems.
Medicare tax differences
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No cap on Medicare tax earnings: “Wait,” say tax observant readers of the ol’ blog. “More than 6.2 percent comes out of MY paycheck. What’s the deal?”
Y’all are right. The total payroll tax amount, paid equally by you via withholding from your pay and by your boss, is 7.65 percent. That other 1.45 percent tax covers Medicare, the government medical insurance benefit that also costs retirees.
There is no income cap on the Medicare payroll tax component, paid by both employees and employers. Advocates of axing the Social Security wage base point to this difference as evidence it can work.
So, while the Social Security wage base will stop the FICA tax on earnings exceeding $184,500 this year and $192,300 in 2027, Uncle Sam will continue to collect the Medicare payroll tax on all your earnings both years from you and your employer, regardless of how much you make.
ACA add-on: Higher paid individuals also could face a Medicare surtax created as part of the Affordable Care Act, aka the ACA or Obamacare.
This 0.9 percent additional Medicare tax on employees applies to single taxpayers who earn more than $200,000. The surtax kicks in for married filing jointly couple with earnings of more than $250,000. Spouses who file separate returns will face the added Medicare tax if their individual earnings exceed $125,000.
Those Medicare surtax earnings limits are not adjusted for inflation. They are set by the health care law.
The bottom line is that all of us pay FICA’s Social Security and Medicare taxes on at least some of our income. And the wealthier among get a break on the Social Security tax portion, they must pay 0.9 percent more toward Medicare.
Retirees, COLAs, and taxes
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Retiree COLA benefits and costs: Now to the around 76 million Americans who receive Social Security retirement and/or SSI benefits.
Next year’s 3.6 percent increase in their monthly checks, a jump from the 2.8 percent bump they got this year, is the largest federal retirement benefits increase since 2023.
On average, 2027’s benefits will increase by $75 per month, according to the Social Security Administration.
Social Security beneficiaries who have created a my Social Security account can find specifics in their personal COLA notice online starting in late November. Individuals who have not enrolled in paperless notices will receive their COLA notice by U.S. Postal Service mail in December.
Other inflation offsets increase: It’s a safe bet that no Social Security or SSI recipient will turn down the coming 3.6 percent benefits hike.
But many who rely primarily on the monthly federal payments say this latest increase likely will not be enough to cover other costs, which also have absorbed inflation’s effects.
Housing, either rent or property taxes for homeowners, have increased across much of the United States. Folks on fixed incomes also face challenges from persistently high prices for groceries and utilities.
Then there are health care costs, which older people tend to incur more than the younger population.
Overall expenses for medical services went up 3.7 percent year-over-year in September, according to recently released data from the Bureau of Labor Statistics. And while many older Americans don’t drive, increased fuel prices due to the Iran War will add to the delivery costs of all consumer products, whether shoppers buy them at retail outlets or have them brought directly to their homes.
Premiums for Medicare Part B, the government health insurance component that covers medically necessary outpatient treatments and preventive care for older Americans, is expected to go up next year.
Such increases have occurred for the last five years. The continued upward trend, according to government and health care analysts, is likely to continue due to higher medical and drug costs.
And no, that one-time $90 premium rebate that almost 21 million Medicare enrollees got this month will be long gone by the time the 2027 amounts take effect.
Earnings limits for early retirees: Difficulty covering growing day-to-day expenses is why some Social Security recipients work, at least part-time.
But if you opt to collect Social Security before reaching your full retirement age and still work, you could lose part of your government benefits. In such instances in 2026, the SSA deducts $1 from benefits for each $2 you earn in excess of $24,480.
You can earn more without benefits consequences in the year you reach full retirement age. In 2026, the limit is $65,160 per year for the months prior to the month you reach your full retirement age. Social Security withholds $1 in benefits for every $3 you earn above this limit.
The good news is that the amount you can earn before your Social Security benefit is reduced is adjusted for inflation each year. The IRS should be released those amounts (and others) this month.
Finally, once you hit your full retirement age, go wild with the earnings. Uncle Sam generally has no problem with these Social Security recipients collecting other earned income.
Taxable Social Security: There is, however, one other tax matter that retirees receiving Social Security must consider.
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 federal retirement amount is partially taxable.
Partially actually is substantial. Either 50 percent or 85 percent of Social Security benefits are taxed depending when your income total, including your federal benefits, reach a certain level.
My post back in June on inflation and Social Security has details on how this amount is figured. The key calculation to note is that when you have other income (such as taxable pensions, wages, interest and dividends, along with tax-exempt interest), you’ll have to add one-half of your year’s Social Security to those amounts. When the resulting combined income exceeds base amounts based on your filing status, you are going to owe tax on half or 85 percent of your Social Security benefits.
Single, head of household and qualifying widow(er) filers whose base combined income is between $25,000 and $34,000 will generally have to pay tax on up to 50 percent of their Social Security benefits. When combined income is $34,001 or more, these taxpayers will face ordinary income tax on up to 85 percent of their Social Security benefits.
Married couples who file joint returns face tax 50 percent of their Social Security payments when their combined base income is between $32,000 and $44,000. Joint filers with income of more than $44,000 will see up to 85 percent of their federal retirement benefits subject to income tax.
Of course, few have ever turned down more money, whether working or getting retirement benefits. But knowing the tax impacts can help you plan on how to deal with and possibly reduce or offset their costs.
More inflation info ahead
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Sort of an inflation adjustment: This annual Social Security adjustment sometimes is referred to as an inflation-based increase. However, it officially is a cost-of-living, or COLA, amount.
And technically, it is not indexed for inflation.
Instead, each year the SSA uses a specific formula to set the maximum taxable earnings level when a COLA is effective so that Social Security benefits can keep pace with, you guessed it, inflation.
And yes, that twisty connection is why I include the Social Security wage base announcement in the ol’ blog’s annual 10-part tax inflation adjustments series, typically as part of the post on the Alternative Minimum Tax (AMT) and other earnings issues. That’s where this link will end up when the IRS announces, as noted earlier the rest of the tax-related inflation adjustments for 2027.
The IRS already issued (back in May) such changes in 2027 for the health savings accounts (HSAs) and high deductible health plans (HDHPs). That will be part of the annual inflation series’ item on medical provisions.
Until then, you can get an idea of what to expect in 2027 inflation-wise by perusing the 2026 series, which kicked off last October with the traditional look at the annual changes to income tax brackets. The directory at the end of that post has links to the other nine+ posts with amounts that apply to our 2026 tax returns.
