In 2025, millions of American retirees are celebrating a bigger Social Security check thanks to the latest COLA (Cost-of-Living Adjustment). But while more money sounds great, there’s a catch many didn’t expect — higher taxes.
Recent studies and tax estimates show that some retirees may face up to 50% higher taxes on their benefits, thanks to COLA pushing them into new income brackets. Let’s break down what’s happening, why it’s causing problems, and what you can do to manage your retirement income better.
What is COLA and Why Is It Important?
The Cost-of-Living Adjustment (COLA) is an annual increase in Social Security benefits. It helps retirees keep up with inflation — when everyday items like food, medicine, and housing become more expensive.
In 2024, the COLA was set at 3.2%, based on the CPI-W (Consumer Price Index for Urban Wage Earners and Clerical Workers). This adjustment gave retirees a few extra dollars each month. For example, someone getting $1,800 per month in 2023 might now be getting about $1,858 per month.
This extra income sounds like a good thing, right? Yes — but only if taxes didn’t eat a big chunk of it.
How Social Security Benefits Are Taxed
Many people assume Social Security benefits aren’t taxable — but that’s only true if you have very little income besides Social Security. Most retirees have other income like pensions, savings, or part-time work.
The IRS uses a formula to decide how much of your Social Security is taxable:
- If you file as individual and your combined income is:
- Below $25,000 → No tax
- $25,000 to $34,000 → Up to 50% of benefits taxable
- Above $34,000 → Up to 85% of benefits taxable
- For married couples filing jointly:
- Below $32,000 → No tax
- $32,000 to $44,000 → Up to 50% of benefits taxable
- Above $44,000 → Up to 85% of benefits taxable
Combined income = Adjusted Gross Income + Nontaxable Interest + 50% of Social Security benefits
So, if the COLA increase bumps up your monthly benefit, your combined income also goes up — and suddenly, you may find yourself in a higher tax bracket.
The 50% Tax Hike: What’s Causing It?
According to recent reports and financial advisors, retirees are now seeing up to a 50% increase in tax bills just because their Social Security check got bigger.
This is especially frustrating because:
- COLA helps offset inflation — but higher taxes take away that gain.
- The income thresholds mentioned above haven’t been updated since 1984. That’s right — the tax limits were set over 40 years ago and are not adjusted for inflation like benefits are.
- As inflation increases, COLA increases — but tax brackets stay the same. This means more and more people get taxed on benefits every year.
“It’s a quiet tax hike that hits seniors the hardest,” says Mary Johnson, a Social Security and Medicare policy analyst at The Senior Citizens League.
Who Is Affected Most?
Retirees who have modest incomes — not rich, but not entirely dependent on Social Security — are often hit hardest. This includes:
- Seniors with small pensions
- Those withdrawing from retirement accounts like 401(k)s or IRAs
- Couples where one spouse still works part-time
Even a small increase in monthly income can tip the scale and make a big chunk of Social Security taxable.
Will Congress Fix It?
Several senior advocacy groups, including AARP and The Senior Citizens League, have urged Congress to update the income thresholds for taxing Social Security. They argue that without changes, more seniors will lose a bigger part of their income every year.
But so far, no solid legislative action has been taken. It’s unclear if any changes will be made before the 2025 tax season.
What Can Retirees Do?
Here are a few ways seniors can protect themselves from paying more taxes on their Social Security benefits:
1. Manage Withdrawals Smartly
If you have savings in 401(k) or traditional IRA accounts, be strategic about how much you withdraw. Smaller withdrawals may keep you under the taxable income threshold.
2. Consider Roth Conversions
Roth IRA withdrawals are not taxable, and don’t count towards combined income. Converting some traditional IRA funds to Roth accounts before retirement may help.
3. Delay Taking Benefits
If you haven’t started Social Security yet, delaying it until age 70 increases your monthly check — and may help you plan tax-wise too.
4. Get Tax Advice
Talk to a tax advisor who understands retirement income. They can help create a plan that minimizes taxes and maximizes your benefits.
Final Thoughts
COLA was designed to help retirees keep up with rising costs. But outdated tax rules are now turning this benefit into a burden for many.
A 3.2% COLA in 2024 gave seniors more monthly income — but also pushed some into a new tax bracket. And unless lawmakers adjust the tax thresholds, this issue will only get worse over time.
If you’re a retiree or planning for retirement soon, don’t ignore the tax side of Social Security. Smart planning today can help you avoid losing more of your hard-earned benefits tomorrow.