2026 Social Security Updates: How Tax Returns and Retirement Benefits Intersect

If you’re receiving Social Security benefits in 2026, your tax return this year could look quite different from previous years. Several key policy shifts are coming that will directly affect how much you actually receive each month—and what you owe when filing your taxes. Understanding these updates now can help you better plan your finances.

The 2.8% COLA: More Than It Appears

The first thing most retirees notice is the 2.8% cost-of-living adjustment (COLA) to their Social Security benefits. This bump raises the average monthly payment from $2,015 to $2,071. While a raise is always welcome, it’s important to understand what this number actually represents.

The COLA is calculated using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), a metric that doesn’t accurately reflect how inflation impacts retirees. The index assigns relatively low weight to healthcare expenses, which consume a much larger portion of retirement budgets compared to younger workers’ expenses. This means the 2.8% adjustment may not fully account for the actual inflation retirees experience.

Even more significant is that the Medicare Part B premium increase will substantially reduce this COLA gain. The Part B premium is climbing 9.7% to $202.90 from $185 in 2025. Since these premiums are automatically deducted from Social Security payments, many retirees will find their net increase is far smaller than 2.8%—sometimes less than 1% after the premium hike is applied.

Earnings Limits and Tax Return Implications

For retirees who continue working, 2026 brings important changes that directly affect both Social Security withholding and your tax return situation. The earnings threshold above which Social Security benefits are reduced has risen to $24,480 from $23,400 in 2025.

Here’s how the withholding works: If you claim Social Security before reaching full retirement age and earn more than $24,480, the Social Security Administration will withhold $1 in benefits for every $2 you earn above that threshold. This calculation becomes critical when preparing your tax return, as it determines how much in benefits you actually received during the year.

The rules change during the year you reach your full retirement age. During that year only, the limit rises to $65,160, with a more favorable withholding rate of $1 for every $3 earned above the limit. Once you reach your full retirement age, the earning restriction disappears entirely—you can work and earn as much as you want without any benefit reduction, though you’ll still owe FICA taxes on those earnings.

New Full Retirement Age: 67 Becomes the Standard

After 2026, the full retirement age for all Americans is now permanently set at 67. This marks the conclusion of a gradual increase that began in 1983 and slowly phased up from age 65. Unless Congress intervenes, 67 will remain the target age for anyone seeking unreduced benefits going forward.

Higher FICA Tax Thresholds in 2026

Working retirees also need to be aware that the maximum earnings subject to Social Security FICA taxes has increased. The threshold climbs to $184,500 in 2026, up from $176,100 in 2025. Even after reaching your full retirement age, you’ll continue paying Social Security and Medicare taxes on your earnings at these higher income levels.

Medicare Premium Increases Cut Into Social Security Gains

As mentioned earlier, the 9.7% surge in Medicare Part B premiums significantly reduces the real impact of the 2.8% Social Security increase. This is perhaps the most sobering reality for 2026. While your statement shows a COLA increase, the automatic deduction of Part B premiums means your monthly deposit actually grows much more modestly.

This intersection between Social Security COLAs and healthcare costs is a recurring challenge for retirees, and it underscores why understanding the full picture matters when planning your retirement finances.

The Senior Tax Deduction: Understanding the Details

One provision that may help offset some costs is the additional federal tax deduction available to individuals age 65 and older. This deduction, included in recent tax legislation, is sometimes called a “senior bonus” and can reduce your federal income tax liability.

However, there are two important limitations. First, eligibility for the full deduction depends on your modified adjusted gross income (MAGI). Not everyone will qualify for the maximum benefit. Second, this deduction is temporary—it expires after 2028, so plan accordingly.

Planning Ahead for Your 2026 Tax Return

These multiple changes require retirees to take a more comprehensive approach to their finances. When preparing your 2026 tax return, you’ll need to account for the new earnings limits, potential FICA tax implications, the reduced net impact of the COLA after Medicare premiums, and the potential benefit of the new tax deduction for seniors. Taking time to understand how these pieces fit together will help ensure you’re not leaving money on the table and that you’re properly positioned for continued retirement security.