Some retirees will not be able to keep all of their 2025 cost of living adjustment (COLA). Here’s why.

We’re about a month away from the 2025 cost of living adjustment (COLA) announcement. Many seniors feel that recent COLAs haven’t helped their checks keep up with inflation as they should, and next year’s COLA likely won’t do nothing to change that. We don’t yet know what it will be, but current forecasts put it below the 3.2% achieved by beneficiaries last year.

That’s not the only worrying thing about next year’s COLA, though. An often-overlooked Social Security rule could force some seniors to give a portion of their checks back to the government. Here’s how to know if it will affect you.

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Taxes for Social Security benefits cost seniors more every year

Social Security has three sources of funding. The most important is the payroll taxes that workers pay on their annual income. There is also interest earned on money in Social Security trust funds. The third source is a tax on certain Social Security recipients whose incomes exceed certain thresholds.

The latter has become increasingly problematic for seniors. To determine who is eligible for tax, the government looks at your provisional income. This is defined as your adjusted gross income (AGI), plus any tax-free interest you have and half of your annual Social Security benefit. For example, if you receive $24,000 annually from Social Security and have an AGI of $50,000 and no taxable interest, your provisional income would be $62,000.

Provisional income above certain amounts for your marital status could result in a tax on Social Security benefits, as shown in the table below:

Data source: Social Security Administration.

Interestingly, the benefit tax thresholds have not changed for decades. As a result, more and more seniors find themselves owing these taxes as their benefits increase due to COLAs. Those who already pay these taxes on a regular basis could owe more in future years than they do now. This leaves them with less money to put toward their own living expenses.

But it’s not as bad as it might seem at first. In fact, you won’t lose 50% or 85% of your benefits. Instead, this is the amount of benefits you might pay ordinary income tax on. So, for example, if your provisional income is in the 85% tax bracket and you’re in the 22% tax bracket, then you can pay 22% tax on up to 85% of your benefits. Still not great , but it’s better than losing most checks to the IRS.

How you can prepare

Seniors worried about owing taxes on their Social Security benefits could reduce their risk by limiting the amount of taxable retirement account withdrawals they make. These increase your AGI and, in turn, your provisional income. Relying more on your Roth retirement savings, if you have them, won’t affect your AGI because these withdrawals are generally tax-free.

Avoiding taxes on Social Security benefits is not always possible, however. If you expect to owe them, the best thing you can do is plan for them. You could work with a tax professional to estimate how much you might owe and put that money aside to cover your tax obligations. Or you could contact the Social Security Administration and ask them to withhold money from your benefit checks for taxes.

You may also want to check whether you might owe state taxes on your Social Security benefits. Currently, nine states tax the benefits of some of their seniors, although that number has declined. Even in states that have these taxes, they are usually limited to high income earners.

It’s best to keep this information in mind even if you don’t currently owe taxes on Social Security benefits. You can face them in a few years as COLAs continue to add to your benefits, and knowing this in advance will help you prepare.