On October 14, the Social Security Administration will announce next year’s cost-of-living adjustment, and most coverage will treat it as simple good news: checks go up. What almost nobody mentions is the second thing a COLA does. It nudges millions of retirees closer to a set of tax thresholds that have sat at the same dollar amounts since the 1980s and 1990s. That gap is the key to how Social Security benefits are taxed. The tax isn’t really a fixed rule. It’s a slow, automatic increase written into the law, and every raise in benefits feeds it.
Provisional income decides how Social Security benefits are taxed
The IRS doesn’t look at your Social Security check by itself. It runs a separate calculation first, usually called provisional income (the Congressional Budget Office calls it modified AGI). You take your adjusted gross income from everything else, such as pension payments, IRA withdrawals, wages, and taxable interest. Then you add any tax-exempt interest, like municipal bond income, and half of your Social Security benefits.
That total gets compared to two pairs of lines. For a single filer, they sit at $25,000 and $34,000. For a married couple filing jointly, they sit at $32,000 and $44,000. Below the first line, none of your benefits count as income. Between the lines, up to 50% can count. Above the second line, up to 85% can count.
One detail surprises people: tax-free municipal bond interest is “tax-free” everywhere except here. It goes into provisional income dollar for dollar, so it can make your Social Security taxable even though the interest itself never is.
And note the wording. “Up to 85% is taxable” doesn’t mean you pay an 85% tax. It means up to 85% of your benefits gets added to your other income, and then your ordinary tax brackets apply to the total. The 85% is a ceiling on how much of the check the IRS can count, nothing more.
The thresholds aren’t indexed, and that’s the whole story
Most numbers in the tax code move with inflation every year. The standard deduction does. The brackets do. Social Security’s own benefit amounts do. These thresholds don’t. The first tier took effect in 1984, the 85% tier in 1994, and according to CBO’s August 2026 report on the taxation of benefits, the thresholds were last changed in 1994. A $25,000 line drawn in the Reagan era is still a $25,000 line today.
When the rule began, it was aimed at higher-income retirees. Inflation has slowly redefined who counts as higher income. CBO estimates that in 2026, 58% of beneficiaries will have provisional income above the top threshold, and slightly more than half of all beneficiaries will owe some tax on their benefits.
The mechanism speeds up when prices rise fast, because COLAs push benefits up and the lines stay put. CBO found that from 2021 to 2024, a stretch of high inflation, the number of tax returns with taxable Social Security grew 14%, while the taxable amount of benefits grew 44%. In the calmer years from 2016 to 2019, those figures were 12% and 26%. CBO projects that income taxes on benefits will rise from 7.1% of total benefits in 2026 to 9.0% by 2056, and that about two thirds of that growth comes from the frozen thresholds rather than from benefits getting bigger.
A worked example shows the jump in the middle
Picture a single retiree, age 67, collecting the average retired-worker benefit, which SSA put at $2,071 a month in January 2026. That’s $24,852 a year. She also withdraws $30,000 a year from a traditional IRA.
Her provisional income is $30,000 plus half her benefits ($12,426), so $42,426. That’s $8,426 above the $34,000 line. The formula counts 85% of that excess ($7,162.10) plus a flat $4,500 from the middle tier (half of the $9,000 gap between $25,000 and $34,000). So $11,662.10 of her Social Security becomes taxable income.
Her adjusted gross income comes to $41,662.10. In 2026 she subtracts the $16,100 standard deduction, the $2,050 extra standard deduction for being over 65, and the new $6,000 senior deduction, for $24,150 in total. Taxable income is $17,512.10. The first $12,400 is taxed at 10% ($1,240), and the remaining $5,112.10 at 12% ($613.45). Her federal tax is $1,853.45.
Now she pulls one more $1,000 from the IRA. That $1,000 is taxable on its own, but it also raises her provisional income by $1,000, which drags another $850 of Social Security into taxable income. Her taxable income rises by $1,850, not $1,000. At 12%, that’s $222 more tax. On a $1,000 withdrawal, she pays a 22.2% marginal rate even though her bracket says 12%.
That’s what financial planners call the tax torpedo. CBO describes the same effect in drier language: in the phase-in range, a dollar of other income can bring up to 85 cents of benefits along with it. Your official bracket and the rate you actually pay on the next dollar stop matching.
The $6,000 senior deduction hides the problem until 2028
The 2025 tax law added an enhanced deduction of $6,000 per person aged 65 or older (or $12,000 for a couple who both qualify), starting to phase out above $75,000 of modified AGI for single filers and $150,000 for joint filers, according to the IRS. It was widely sold as “no tax on Social Security.” Look at where it sits in the calculation, though. It comes off after provisional income is figured. It doesn’t change how much of your Social Security counts as income. It only shrinks the income that gets taxed.
For our retiree, the deduction is worth exactly $720 a year ($6,000 times her 12% rate). It can’t stop the next $1,000 withdrawal from pulling $850 of benefits into taxable income, so the torpedo is still there. And the deduction expires after the 2028 tax year. If nothing changes, in 2029 her same income produces a bill of about $2,573 at 2026 brackets, and every COLA between now and then will have pushed more of her benefits into the 85% tier.
Where the tax money goes explains why nobody fixes it
The thresholds have a reason to stay frozen, and it has to do with the money’s destination. This tax doesn’t go into the general Treasury pot. CBO estimates that of the $120 billion in income tax collected on Social Security benefits in 2026, $66 billion goes to Social Security’s retirement trust fund, $2 billion to the disability fund, and $53 billion to Medicare’s Hospital Insurance trust fund. The money from the first 50% tier goes to Social Security. The money from the 85% tier, the one added in 1993, goes entirely to Medicare.
That makes the frozen thresholds a quiet financing tool for two programs that are short of money. CBO calculates that without this revenue, both the Social Security retirement fund and Medicare’s hospital fund would run dry in fiscal 2031. For Medicare, that’s about nine years earlier than projected now. Indexing the thresholds would be fair to retirees, and it would also speed up the date both trust funds run out. That tradeoff is why the lines have stayed where they are for three decades.
If you’re five or ten years from claiming, this is the practical takeaway. The order you draw income in retirement matters, because IRA withdrawals and Social Security interact in the provisional income formula, and Roth withdrawals don’t count toward it at all. CBO notes that some people convert traditional IRA money to Roth before claiming benefits for exactly this reason. Our explainers on how Social Security works and marginal versus effective tax rates fill in the rest. Once you see the formula, how Social Security benefits are taxed stops looking random. The thresholds stand still, benefits rise, and every year a little more of the check counts as income.