The Projected 2027 Social Security COLA Is Bigger. Your Tax Bill May Not Be.
Advocacy groups project a 2027 Social Security cost-of-living adjustment between 3.6% and 3.8%, up from the 2.8% increase paid for 2026. The Social Security Administration confirmed that 2.8% COLA on October 24, 2025, raising the average retired-worker benefit from $2,015 to $2,071 a month. At 3.8%, the same average benefit would amount to about $2,150 per month, or $25,800 per year. The 2027 figure is not official yet and will not be until October.
If you collect Social Security while living overseas, you get the identical raise. Most retirees abroad will owe nothing on their Social Security benefits, even after they go up, because at least 15% of a Social Security benefit is always tax-free, and below a threshold, none of it is taxable at all. The catch worth knowing is that the benefit rises with inflation each year, while the tax thresholds never do. Here is how that plays out.
An Inflation Formula Sets Your COLA Every Year
A cost-of-living adjustment, or COLA, is the annual increase applied to Social Security and Supplemental Security Income benefits so that inflation does not erode their purchasing power. By law, it equals the percentage rise in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of one year to the third quarter of the next.
That formula is why the 2027 number does not yet exist. It depends on July, August, and September 2026 inflation data, and the Bureau of Labor Statistics does not publish the September CPI until October 14, 2026. SSA announces the official figure shortly after.
The Projections Range From 3.6% to 3.8% and Have Already Moved
The Senior Citizens League has held its estimate at 3.8% through July, AARP’s projection sits at 3.6%, and independent analyst Mary Johnson lowered hers to 3.7% after June inflation came in softer than expected. All three can move again before October.
| Measure | 2026 (official) | 2027 (projected) |
|---|---|---|
| COLA | 2.8% | 3.6% to 3.8% |
| Average retired-worker benefit, monthly | $2,071 | About $2,146 to $2,150 |
| Average retired-worker benefit, annual | $24,852 | About $25,750 to $25,800 |
| Announced | October 24, 2025 | Expected after October 14, 2026 |
Sources: the SSA 2026 COLA fact sheet and the BLS CPI release schedule. The 2027 benefit figures apply the projected range to SSA’s own post-COLA average.
Social Security Is Never Taxed in Full, and Often Not Taxed at All
The IRS never taxes more than 85% of a Social Security benefit, so at least 15% is always tax-free, and below a threshold, none of it is taxable at all.
The test runs on a figure called combined income. That is not your benefit and not your adjusted gross income. It is a specific calculation:
Combined income = your other income + your tax-exempt interest + one half of your Social Security benefits
Compare that total to the thresholds for your filing status
| Your combined income | Single or head of household | Married filing jointly | Portion of the benefit that is taxable |
|---|---|---|---|
| Below the base amount | Under $25,000 | Under $32,000 | None |
| Between the two amounts | $25,000 to $33,999 | $32,000 to $43,999 | Up to 50% |
| Above the upper amount | $34,000 or more | $44,000 or more | Up to 85% |
Source: IRS Publication 915 and the IRS guidance on Social Security income. These thresholds have never been adjusted for inflation.
Your Other Income Decides Whether the Benefit Is Taxed at All
Both cases below use the projected 2027 average benefit of $25,800 and a single filer living abroad. The only thing that changes is the pension.
With a $12,000 pension, nothing is taxable
Half your benefit is $12,900. Add the pension, and your combined income is $24,900, which is below the $25,000 base amount. None of your Social Security is taxable.
With an $18,000 pension, a small slice is taxable
Half your benefit is still $12,900, so your combined income is $30,900. That sits in the middle band, where the taxable amount is the lesser of half your benefits or half the amount above the threshold. Half of $5,900 is $2,950, so $2,950 of your benefit becomes taxable income.
There is also a newer deduction working in your favor. For tax years 2025 through 2028, anyone who reaches age 65 by the last day of the year may claim an additional $6,000 deduction, or $12,000 for a married couple where both spouses qualify. It phases out above $75,000 of modified adjusted gross income, or $150,000 filing jointly, and it is claimed on Schedule 1-A, whether or not you itemize. In the second case above, that $6,000 deduction is more than double the $2,950 that became taxable.
The Foreign Earned Income Exclusion Cannot Shelter Social Security
A lot of people assume the exclusion covers this. It does not. The Foreign Earned Income Exclusion covers earned income only, meaning wages and self-employment income for work you performed abroad. Social Security is unearned income, so the exclusion cannot shelter a dollar of it, regardless of how long you have lived overseas.
The Foreign Tax Credit usually helps instead, but only where your country of residence taxes the benefit, because a credit needs foreign tax to offset. If your treaty exempts the benefit locally, there is no foreign tax and no credit.
Your Treaty Decides Whether Your Country of Residence Taxes It Too
Most U.S. tax treaties contain a saving clause, which lets the United States tax its own citizens as though the treaty did not exist. That is why a U.S. citizen abroad still reports the benefit on Form 1040, or Form 1040-SR, if 65 or older.
The U.S.-U.K. treaty is the clearest exception. Article 17(3) says social security paid by one country to a resident of the other is taxable only in the country of residence, and Article 1(5)(a) removes that paragraph from the saving clause. A U.S. citizen living in the U.K., therefore, has U.S. Social Security taxed by the U.K. instead of the United States. That comes from the specific treaty text and does not carry over elsewhere.
Other retirement destinations differ, and some assign taxing rights to the paying country instead. Read the article that applies to you in the IRS treaty documents. One clarification: a totalization agreement governs contributions and benefit eligibility, not income tax on benefits already being paid.
What This Means for You
How much this matters depends on where your income comes from.
- Living mainly on Social Security: a 3.8% raise is far more likely to keep pace with your costs than to create a tax bill. Most people in this position stay under the base amount and owe nothing on the benefit.
- Drawing on a pension, rental income, or investments too: the COLA is the input you cannot control, so work on the ones you can. Withdrawal timing and Roth conversions move combined income; the benefit does not.
- Still working abroad while collecting benefits: the retirement earnings test limit is $24,480 for 2026 if you are under full retirement age, and SSA asks you to report work performed outside the United States.
- Comparing destinations before a move: local Social Security treatment varies far more than COLA does. Our guides to states that do not tax retirement income and tax-friendly retirement countries cover both sides.
Steps to Take Now
- Calculate your combined income. Add your other income, your tax-exempt interest, and half of your projected 2027 benefit.
- Compare that total to your thresholds. $25,000 and $34,000 if single, $32,000 and $44,000 if filing jointly. If you land below the first number, you owe nothing on the benefit.
- Check whether the senior deduction applies. If you reach 65 by December 31 and your modified adjusted gross income is under $75,000, or $150,000 filing jointly, the extra $6,000 per qualifying spouse sits on top of your standard deduction.
- Read the social security article of your own treaty. Do not assume the U.K. result applies where you live.
- Adjust withholding or estimated payments only if you are crossing a threshold. Form W-4V lets you request voluntary withholding from the benefit itself.
- Wait for the official figure on or after October 14, 2026, before finalizing anything. Your COLA notice appears in the my Social Security Message Center in late November, which beats waiting on international mail.
Our team runs this calculation for retirees abroad every filing season, including the treaty position.
Most retirees abroad owe far less than they expect
Frequently Asked Questions
Yes. The cost-of-living adjustment applies to every beneficiary regardless of where they live, and it is applied automatically. Your gross benefit rises by the same percentage as someone living in the United States.
For U.S. citizens and green card holders, yes, under the same rules that apply at home. None of the benefits is taxable if your combined income is below $25,000 filing single or $32,000 filing jointly. Above those figures, up to 50% is taxable, rising to a maximum of 85%. Your treaty may instead shift taxing rights to your country of residence.
No. The exclusion covers earned income from work performed abroad. Social Security is unearned income and falls entirely outside it. The Foreign Tax Credit is the more relevant relief, but only where your country of residence taxes the benefit.
After the Bureau of Labor Statistics publishes the September 2026 Consumer Price Index on October 14, 2026. Every figure available before that date is a projection.
No, not by itself. Only part of your benefit is ever taxable, so a COLA moves the number far less than people expect. The thresholds are not indexed to inflation, so repeated COLAs can gradually make more of the benefit taxable over time, and the $6,000 senior deduction available through 2028 offsets a meaningful share of that for anyone 65 or older under the income limits.
The information in this article is for general informational purposes only and does not constitute tax, legal, or financial advice. The 2027 cost-of-living adjustment figures cited here are third-party projections, not official Social Security Administration figures, and the official adjustment may differ. Tax rules are complex and change frequently. Consult a qualified tax professional regarding your specific situation before taking any action.
