Your 2027 Social Security increase is set by a formula. What happens to that raise after it arrives depends on rules most retirees never see coming, and on decisions you can still influence.
Last week, we looked at which retirement checks get a raise. This week, we need to ask a different question: how much of that raise do you actually get to keep?
The Social Security Administration has announced a [2027 COLA] increase for the coming year. That’s the headline. But for millions of retirees, the headline and the deposit are two different numbers.
Between the raise and your bank account sit two quiet forces: a tax rule written decades ago and a Medicare rule that looks backward two years. Neither one makes the news. Both can shape your retirement income for years.
Let’s walk through them.
The Tax Threshold That Hasn’t Moved
Many people are surprised to learn that Social Security benefits can be taxed at the federal level. Depending on your income, up to 85% of your benefits can be included in your taxable income.
Whether that happens depends on a figure called combined income:
Combined income = adjusted gross income + tax-exempt interest + one-half of your Social Security benefits
Then compare that number to these federal thresholds:
| Filing status | No benefits taxed | Up to 50% taxable | Up to 85% taxable |
|---|---|---|---|
| Single | Below $25,000 | $25,000 to $34,000 | Above $34,000 |
| Married filing jointly | Below $32,000 | $32,000 to $44,000 | Above $44,000 |
Here’s what most people don’t know. These thresholds have never been adjusted for inflation. The first tier was set in 1983. The second tier was added in 1993. Benefits have grown with nearly every cost-of-living adjustment since then. The thresholds have stayed exactly where they were.
That creates a slow, steady drift. Every raise adds half its amount to your combined income. The line you’re measured against doesn’t move. Over time, retirees who once paid nothing on their benefits can find a portion becoming taxable, even when their lifestyle hasn’t changed at all.
One clarification matters here: “up to 85% taxable” does not mean 85% of your benefits goes to taxes. It means up to 85% of your benefits can be counted as taxable income and then taxed at your ordinary rate.
The Municipal Bond Surprise
Many retirees hold municipal bonds because the interest is generally free from federal income tax. That part is true.
But notice what’s in the combined income formula: tax-exempt interest. Municipal bond interest isn’t taxed itself, but it is added into the calculation that determines whether your Social Security is taxed.
So a retiree can earn “tax-free” interest that still causes more of their benefits to become taxable. The interest stays untaxed. Its presence can still raise your tax bill. If munis are part of your income plan, it’s worth knowing how they interact with your benefits.
The Two-Year Medicare Lookback
The second force is Medicare’s Income-Related Monthly Adjustment Amount, better known as IRMAA.
Higher-income Medicare beneficiaries pay more than the standard premium for Part B (medical coverage) and Part D (prescription drug coverage). These extra amounts are added on top of the regular premiums. For many people, the Part B premium comes directly out of their Social Security check.
The key detail is timing. Social Security doesn’t use your current income to set these surcharges. It uses your tax return from two years earlier:
- Your 2025 income can affect your 2027 Medicare premiums.
- Your 2026 income, which is still being shaped through December 31, can affect your 2028 premiums.
For 2026, surcharges began when modified adjusted gross income exceeded $109,000 for single filers or $218,000 for joint filers. The 2027 brackets will be announced this fall. The income measured includes tax-exempt interest, so the municipal bond point applies here too.
Why One-Time Income Events Matter
Because the lookback captures a single year, a one-time spike in income can lead to higher Medicare costs later. Common examples include:
- A Roth conversion
- A large withdrawal from a traditional IRA or TSP
- The sale of a business
- The sale of investment property
- A large capital gain
- A severance or lump-sum payment in your final working year
IRMAA works in tiers. Crossing a threshold, even by a small amount, can move you into a higher surcharge level for that year. This doesn’t mean you should avoid these moves. A Roth conversion may still be the right decision. It does mean they deserve to be planned with the Medicare calendar in view, not discovered afterward.
When Your Income Has Dropped
Sometimes the two-year-old tax return no longer reflects your life. Social Security allows beneficiaries to request a new determination when their income has fallen because of certain qualifying life-changing events. These include:
- Marriage, divorce, or annulment
- Death of a spouse
- Stopping work or reducing work hours
- Loss of income-producing property due to circumstances beyond your control
- Loss or reduction of certain pension income
- Receipt of certain employer settlement payments
This request is made on Form SSA-44, along with supporting documentation.
Be careful with this one. Not every income change qualifies. A voluntary one-time event, such as choosing to sell an investment property or completing a Roth conversion, is generally not considered a life-changing event. But someone who retired in 2025, and whose 2027 premiums are based on their final full-salary year, may have grounds to ask for a review.
Withdrawal Order Matters
This is where planning comes in. The type of account you draw from affects your combined income and your Medicare income in very different ways.
Taxable brokerage accounts. Interest and dividends are generally taxable each year. When you sell, generally only the gain is taxable, not the full amount you take out.
Traditional IRA, TSP, and 401(k) accounts. Withdrawals are generally taxed as ordinary income, which means every dollar typically flows straight into your adjusted gross income.
Roth accounts. Qualified distributions are generally not included in taxable income. That means they don’t raise your combined income or your IRMAA income. Qualification generally requires reaching age 59½ and meeting the five-year rule.
A Hypothetical Example
The following is a hypothetical illustration for educational purposes only.
Two married couples file jointly. Each couple receives $48,000 a year in Social Security benefits. Each couple needs $40,000 a year from savings to cover their lifestyle.
Couple A takes its $40,000 from Roth accounts, as qualified distributions.
- Combined income: $0 + $24,000 (half of benefits) = $24,000
- That’s below the $32,000 threshold.
- Taxable Social Security: $0
Couple B takes its $40,000 from a traditional IRA.
- Combined income: $40,000 + $24,000 = $64,000
- That’s above the $44,000 threshold, so the 85% formula applies:
- 85% of the amount above $44,000: 85% × $20,000 = $17,000
- Plus the lesser of half their benefits or $6,000: $6,000
- Total: $23,000, which is less than the $40,800 cap (85% of $48,000)
- Taxable Social Security: $23,000
Same benefits. Same spending. Couple A reports no taxable Social Security. Couple B reports $23,000 of taxable benefits on top of $40,000 of IRA income.
That doesn’t make Roth withdrawals automatically better. Couple A may have paid taxes years earlier to build those Roth dollars. Couple B may have good reasons for using its IRA first, and required minimum distributions eventually begin for traditional accounts regardless. The point is simple: where your income comes from can matter as much as how much you receive.
Your COLA Is a Formula. What You Keep Is a Strategy.
You can’t control the COLA. You can take steps to understand, and potentially influence, how much of it you keep. Here’s where to start:
- Calculate your combined income. When your benefit notice arrives, add your adjusted gross income, any tax-exempt interest, and half of your new benefit amount. See where you land against the thresholds.
- Map your Medicare lookback. Know which tax year is setting which premium year. If you’re within a few years of 65, your income today already counts.
- Review year-end income events before December 31. Roth conversions, large withdrawals, and property or business sales completed in 2026 will appear on the return that sets your 2028 Medicare premiums.
- Look at how your account types work together. A deliberate mix of taxable, tax-deferred, and Roth dollars can give you more flexibility over your taxable income each year.
- Know your reconsideration options. If a qualifying life-changing event has lowered your income, a request on Form SSA-44 may be worth exploring.
Because every situation is different, coordinate these decisions with a qualified tax professional before acting.
The Bigger Picture
Social Security, your pension, your TSP or IRA, your Roth accounts, your investments, and your Medicare premiums are not separate conversations. Each one affects the others. A decision that looks smart inside one account can create an unexpected cost somewhere else.
Your retirement income deserves to be looked at as a whole, not one account or one benefit at a time.
If you’d like to see how your COLA, taxes, and Medicare costs fit together in your own plan, I invite you to schedule a Wealth Clarity Call. We’ll review your retirement income positioning, identify where the hidden costs may be, and help you approach your next decisions with clarity and confidence.
This article is for educational purposes only and does not constitute individual investment, tax, or legal advice. Rules and thresholds can change, and your situation depends on factors unique to you. Please consult a qualified professional before making financial decisions.
