Federal retirees are expecting larger pension and Social Security payments in 2027, with the 2027 Social Security Cost-of-Living Adjustment (COLA) currently forecast around 3.5%. But will those increases also mean a larger federal income tax bill?
The answer depends on how much retirement income a person receives, how much Social Security is taxable, and which deductions apply. Although a COLA can cause more Social Security benefits to become taxable, that does not necessarily translate into a substantial increase in taxes owed. To see what could happen in 2027, this article compares three hypothetical federal retirees at different income levels, calculating their estimated federal income taxes before and after the projected COLA. The results show that the tax consequences may be smaller than many retirees expect.
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What Three Federal Retirees Could Pay in Taxes
The examples below assume three single retirees, each age 67, covered by the Federal Employees Retirement System (FERS) and receiving both a federal pension and Social Security. Each receives a 2.5% FERS pension increase and a 3.5% Social Security increase in 2027.
The calculations use official 2026 federal income tax rules and projected 2027 tax brackets and deductions derived from the 3.2% inflation adjustment projected by Bloomberg Tax. They include the regular standard deduction, the additional standard deduction for taxpayers age 65 and older, and the temporary $6,000 senior deduction, including its income phaseout.
For simplicity, none of the retirees has other income, itemized deductions, tax credits, or special tax circumstances. The estimates exclude state income taxes and Medicare premiums. The 2027 COLAs and tax figures are projections, not official amounts.
| 2026 annual retirement income | 2026 federal tax | 2027 estimated tax | Change |
|---|---|---|---|
| $20,000 FERS + $18,000 Social Security | $0 | $0 | $0 |
| $40,000 FERS + $28,000 Social Security | $4,234 | $4,432 | +$198 |
| $65,000 FERS + $36,000 Social Security | $10,703 | $11,040 | +$337 |
These estimates use projected 2027 tax brackets and deductions, including a $16,600 standard deduction and a $2,100 additional standard deduction for a single taxpayer age 65 or older. Actual 2027 amounts may differ.
A COLA can increase taxable income without producing a proportionately larger tax bill. In these examples, the retirees who owe additional federal taxes also receive more retirement income than the amount of the tax increase.
Retiree 1: A Larger COLA but No Federal Income Tax
The first retiree receives a $20,000 FERS pension and $18,000 in Social Security benefits, for a total of $38,000 in annual retirement income.
With the assumed COLAs, annual income increases to $39,130 in 2027, a gain of $1,130.
A portion of this retiree’s Social Security benefits is included in income for federal tax purposes. However, after applying the available deductions, the retiree has no federal taxable income and owes no federal income tax in either year.
Having taxable Social Security benefits does not automatically mean a retiree will owe federal income tax. Deductions can offset all of the income that would otherwise be subject to tax.
For this retiree, the projected COLA increases annual income without increasing federal income tax liability.
Retiree 2: More Social Security Becomes Taxable, but the Tax Increase Is Modest
The second retiree receives a $40,000 FERS pension and $28,000 in Social Security benefits, for total annual retirement income of $68,000.
In 2027, the pension increases to $41,000 and Social Security increases to $28,980. Total annual income rises by $1,980.
Because the income thresholds used to determine how much Social Security is taxable are not adjusted for inflation, a larger portion of this retiree’s benefits becomes taxable.
But the retiree also benefits from inflation adjustments to federal income tax brackets and the standard deduction. After accounting for those changes and the senior deductions, the estimated federal tax bill increases from approximately $4,234 in 2026 to $4,432 in 2027.
That is an increase of about $198 in annual federal income taxes against $1,980 in additional retirement income. Before considering inflation, state taxes, and other expenses, the retiree keeps approximately $1,782 of the increase after federal income taxes.
The tax bill rises, but not nearly as dramatically as the increase in taxable Social Security might initially suggest.
Retiree 3: Higher Income Brings Another Tax Consideration
The third retiree receives a $65,000 FERS pension and $36,000 in Social Security benefits, for total annual retirement income of $101,000.
With the projected increases, annual income rises to $103,885 in 2027, a gain of $2,885.
At this income level, 85% of the retiree’s Social Security benefits are already included in income for federal tax purposes—the maximum percentage allowed. That percentage does not increase further, although the taxable dollar amount rises as benefits increase.
There is another factor: the new $6,000 senior deduction begins phasing out when modified adjusted gross income exceeds $75,000 for a single filer. This retiree is above that threshold, so the deduction is already reduced, and the increase in retirement income reduces it further.
After accounting for the projected 2027 tax brackets, deductions, and senior deduction phaseout, the estimated federal tax bill rises from approximately $10,703 to $11,040, an increase of $337.
The retiree still receives approximately $2,548 more annual income after the additional federal income tax. However, this example shows why retirees with higher incomes need to consider more than just their stated tax bracket when planning withdrawals or Roth conversions.
Why a COLA Can Make More Social Security Taxable
The Social Security taxation rules are unusual because the income thresholds have not been adjusted for inflation since they were established in 1984 and expanded in 1993.
For single filers, the thresholds are $25,000 and $34,000. For married couples filing jointly, they are $32,000 and $44,000. The calculation uses combined income, which generally includes adjusted gross income, tax-exempt interest, and half of Social Security benefits.
Depending on combined income, up to 85% of Social Security benefits can be included in taxable income. The Internal Revenue Service (IRS) explains these rules in Publication 915.
As pensions and Social Security benefits increase over time, retirees can cross these thresholds or have a larger share of their benefits become taxable. But the final tax bill also depends on deductions, tax brackets, and other circumstances.
That is why looking only at how much Social Security becomes taxable can exaggerate the financial impact. The more useful question is how much additional federal income tax the retiree owes.
How Your Income Affects Social Security Taxes
Your combined income determines how much of your Social Security benefits may be taxable. The table below shows the thresholds for single filers and married couples filing jointly, along with how additional income can affect the taxable portion of benefits.
| Combined income (single / joint) | What additional income can mean |
|---|---|
| Below $25,000 / $32,000 | Social Security benefits generally are not taxable. A COLA may change that if combined income crosses the threshold. |
| $25,000–$34,000 / $32,000–$44,000 | Up to 50% of benefits can be taxable. An additional dollar of taxable pension or traditional TSP income can cause up to another 50 cents of Social Security to become taxable. |
| Above $34,000 / $44,000, but below the 85% maximum | An additional dollar of taxable pension or traditional TSP income can cause up to another 85 cents of Social Security to become taxable, increasing income subject to tax calculations by as much as $1.85. |
| At the 85% maximum | The taxable percentage of Social Security cannot increase further. A COLA can still increase the taxable dollar amount as benefits rise. |
To estimate your combined income, start with your adjusted gross income before subtracting the standard deduction, add any tax-exempt interest, and then add half your Social Security benefits. Compare that total with the thresholds above. The IRS provides the detailed calculation in Publication 915.
The temporary senior deduction follows a separate set of income rules. It begins shrinking when modified adjusted gross income exceeds $75,000 for single filers or $150,000 for married couples filing jointly. The $6,000 deduction for a single eligible retiree is fully phased out at $175,000. For a married couple with both spouses eligible for the full $12,000 deduction, it is fully phased out at $350,000.
FERS and CSRS Retirees Face Different COLA Rules
The examples above focus on FERS retirees because their pension increases generally differ from Social Security COLAs.
If the 2027 Social Security COLA is 3.5%, eligible Civil Service Retirement System (CSRS) retirees would generally receive the same 3.5% increase on their annuities. Eligible FERS retirees would receive 2.5% under the FERS COLA formula.
Most FERS retirees do not begin receiving pension COLAs until age 62, although exceptions apply to certain disability retirees, survivors, and special-provision retirees. The Office of Personnel Management (OPM) publishes the rules, and the FERS and CSRS COLA Watch page tracks the latest inflation data.
The smaller FERS pension increase is primarily a purchasing-power issue rather than a tax issue. A smaller pension increase generally means less additional taxable pension income, but it also means less income available to offset rising living expenses.
When the Tax Consequences Deserve Closer Attention
The three examples show that ordinary COLA increases do not necessarily create large federal tax increases. However, some retirement income decisions can have more substantial tax consequences than the COLA itself.
A large withdrawal from a traditional Thrift Savings Plan (TSP) account, for example, can increase taxable income and potentially cause more Social Security benefits to become taxable. A Roth conversion can have a similar effect in the year of conversion.
These transactions can also affect the temporary senior deduction, which provides up to $6,000 per eligible person age 65 and older, or $12,000 for a married couple if both qualify. The deduction begins phasing out above $75,000 in modified adjusted gross income for single filers and $150,000 for married couples filing jointly.
Unlike the regular standard deduction, those income thresholds are not adjusted for inflation. The senior deduction is also scheduled to expire after 2028 under current law.
Qualified Roth TSP withdrawals generally do not increase combined income for Social Security taxation purposes. That can make Roth funds useful when managing taxable retirement income, although withdrawal decisions should account for long-term tax planning and retirement spending needs. The TSP website explains the available withdrawal options.
What Federal Retirees Should Do Before 2027
The first step is to wait for the official numbers. The Social Security Administration is expected to announce the 2027 COLA on October 14, and the IRS typically releases the following year’s tax brackets and deductions in October or November.
Once those figures are available, retirees can estimate their total 2027 pension and Social Security income and compare their expected federal income tax liability with 2026.
Those planning large traditional TSP withdrawals or Roth conversions should watch Social Security taxation and the senior deduction phaseout closely. The timing and size of those transactions may have a greater effect on federal income taxes than the annual COLA.
Retirees who expect to owe more tax can also review their withholding. IRS Form W-4V allows beneficiaries to request voluntary federal income tax withholding from Social Security payments.
In the three examples, the COLA changed the federal tax bill by $0 to about $337. A large traditional TSP withdrawal or a Roth conversion can move it by far more, which is why the timing of those decisions deserves more attention than the annual increase.
Common Questions About the COLA and Federal Income Taxes
- Will I owe tax just because part of my Social Security is taxable? Not necessarily. The taxable portion is added to other income, and the standard deduction, the additional deduction for age 65 and older, and the senior deduction can offset some or all of it. In the first example above, the retiree has taxable benefits but owes no federal income tax.
- Will a COLA push me into a higher tax bracket? A COLA could move some of your taxable income into a higher bracket, particularly if you are already close to the threshold. However, only the income above that threshold is taxed at the higher rate—not all of your income. Federal tax brackets are also adjusted for inflation each year.
- Does the smaller FERS pension increase change the tax picture? Slightly. A 2.5% pension increase adds less taxable income than a 3.5% increase would, but it also leaves less income to cover rising costs. FERS retirees under age 62 generally receive no pension COLA, with some exceptions.
- What about Medicare premiums? Medicare premiums are separate from federal income taxes, but they can affect how much of a COLA a retiree keeps. The Medicare Part B premium for 2027 is typically announced in the fall and can absorb part of the increase. Higher-income retirees may also pay an income-related monthly adjustment amount (IRMAA) based on tax return income from two years earlier, so a Roth conversion or large withdrawal this year can affect Medicare premiums later.
- Do states tax Social Security benefits? Most states do not, but a handful do, and the rules vary. Check the guidance from your state revenue department. State taxes are not included in the estimates above.
- I am married. Does this change the answer? Yes. The Social Security taxation thresholds for joint filers are $32,000 and $44,000, and joint tax brackets and standard deductions are larger, so a couple’s results will differ from the single-filer examples. The IRS worksheet in Publication 915 covers joint returns.