Social Security Recipients May Be Disappointed With Tax Refund — Here’s Who’s Affected

For millions of retirees and disability beneficiaries, tax season is delivering an unexpected outcome: a much smaller refund — or no refund at all.

The issue is not an error from the Internal Revenue Service or the Social Security Administration.
Instead, it comes from how retirement income, benefit increases, Medicare costs, and federal debt collections all interact inside the tax system.

In simple terms: many people received more income in 2025 — which created more taxes in 2026.

Below is a full professional breakdown.

Why retirees expected a refund

Most Social Security beneficiaries historically owed little or no federal income tax because their income stayed below taxation thresholds.

Typical expectation:

• Monthly benefits are modest

• Limited withholding during the year

• Refund arrives every spring

But retirement finances have changed. Cost-of-living increases, side income, and withdrawals now push millions into taxable territory for the first time.

1. Social Security is only tax-free at low income levels

Benefits are taxed based on combined income, not just wages.

Combined income formula

Adjusted Gross Income
+ Non-taxable interest
+ 50% of Social Security benefits
= Combined income

Even retirees who consider themselves “low income” can exceed thresholds.

Taxability thresholds

Important:
This does NOT mean 85% tax — it means up to 85% of benefits become taxable income.

Many retirees cross these limits without realizing it.

2. COLA increases can shrink refunds

Annual cost-of-living adjustments raise checks — but also taxes.

When benefits increase:

• Taxable income increases

• Credits phase out

• Refund decreases

Example impact

A retiree may gain $2,000 yearly income — but lose $1,200 of refund.

3. Retirement withdrawals cause “tax torpedo”

Financial planners call this the Social Security tax torpedo.

A small withdrawal can trigger taxes on benefits.

How it happens

Because the formula includes 50% of benefits, income stacks quickly.

4. Medicare premiums indirectly reduce refunds

Higher income also increases Medicare costs through IRMAA (income-related surcharges).

Retirees often mistake this as a tax increase — but it still reduces net refund.

5. Refunds can be taken to repay government debt

The Treasury Offset Program allows federal agencies to seize refunds.

Debts that trigger offsets

Some Social Security recipients are seeing refunds disappear entirely because of overpayment recovery.

6. Why this year feels worse

Several trends hit at once:

Together they create the perception of a “missing refund.”

Who is most affected

The biggest surprises are hitting:

• New retirees

• Part-time working seniors

• Widows/widowers filing single

• Middle-income retirees ($30K–$60K)

• People withdrawing from retirement accounts

Low-income beneficiaries typically remain unaffected.

How retirees can prevent a smaller refund next year

Adjust withholding

File Form W-4V with the Social Security Administration

Plan withdrawals carefully

The bottom line

Many retirees did not actually lose money — they owed taxes they didn’t know they had.

A higher benefit check often means:

• More taxable Social Security

• Fewer credits

• Higher Medicare costs

• Smaller tax refund

The refund shock is not a mistake.
It is the tax system catching up with retirement income.