Social Security:
Calculation and History of Taxing Benefits
Noah P. Meyerson
Analyst in Income Security
April 9August 4, 2014
Congressional Research Service
7-5700
www.crs.gov
RL32552
Social Security: Calculation and History of Taxing Benefits
Summary
Social Security provides monthly cash benefits to retired or disabled workers and their family
members, and to the family members of deceased workers. Those benefits were exempt from
federal income tax, but in 1983, Congress approved recommendations from the National
Commission on Social Security Reform (also known as the Greenspan Commission) to tax the
benefits of some higher-income Social Security beneficiaries. Beginning in 1984, up to 50% of
Social Security and Railroad Retirement Tier I benefits were taxable for individuals whose
provisional income exceeds $25,000. The threshold is $32,000 for married couples. Provisional
income equals adjusted gross income (total income from all sources recognized for tax purposes)
plus certain otherwise tax-exempt income, including half of Social Security and Railroad
Retirement Tier I benefits. The proceeds from taxing Social Security and Railroad Retirement
Tier I benefits at up to the 50% rate are credited to the Old-Age and Survivors Insurance (OASI)
trust fund, the Disability Insurance (DI) trust fund, and the Railroad Retirement system
respectively, based on the source of the benefit taxed.
In 1993, the Omnibus Budget Reconciliation Act (OBRA) increased the share of some Social
Security and Railroad Retirement Tier I benefits that are taxable. That law taxes up to 85% of
benefits for individuals whose provisional income exceeds $34,000 and for married couples
whose provisional income exceeds $44,000. The additional proceeds from that law are credited to
the Medicare Hospital Insurance (HI) Trust Fund.
In 2013, the federal government received $35.4 billion in revenue from taxation of those benefits.
Of that, $21.1 billion was credited to the Social Security trust funds, accounting for 2.5% of its
income. The remaining $14.3 billion was credited to the Medicare trust fund, which equaled 5.7%
of its income.
According to the Congressional Budget Office (CBO), 3949% of Social Security beneficiaries (16.925.5
million people) werewill be affected by the income taxation of Social Security benefits in 2005 (the
most recent year for which the analysis is available)this year. That
share grows over time because the
income thresholds used to determine the share of benefits that
is taxable are not indexed for
inflation or wage growth. As a result, income taxes on benefits will
become an increasingly
important source of income for Social Security and Medicare.
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Social Security: Calculation and History of Taxing Benefits
Contents
Calculation of Taxable Social Security Benefits.............................................................................. 1
Special Considerations .............................................................................................................. 6
State Taxation ............................................................................................................................ 6
Taxation of Social Security Benefits by Income Level.................................................................... 7
Impact on the Trust Funds ............................................................................................................... 9
History of Taxing Social Security Benefits.................................................................................... 10
Figures
Figure 1. Taxable Social Security Benefits as Annual
Non-Social Security Income Increases ......................................................................................... 5
Figure 2.Taxable Social Security Benefits as Total Annual Social Security Benefits
Increase ......................................................................................................................................... 6
Tables
Table 1. Calculation of Taxable Social Security and Tier I Railroad Retirement Benefits .............. 2
Table 2. Example of Calculation of Taxable Social Security Benefits for Single Social
Security Recipients with a $15,000 Benefit and Different Levels of Other Income .................... 3
Table 3. State Income Taxation of Social Security Benefits, Tax Year 2014 ................................... 7
Table 4. Projected Number and Percentage of Beneficiaries with Taxable Social Security Benefits
Benefits by Income Class Under 2005 Law and Income Levels , 2014 ................................................................................................... 8
Table 5. Projected Social Security Benefits and Taxes on Social Security Benefits
by Income Class
Under 2005 Law and Income Levels , 2014.................................................................................................................. 9
Appendixes
Appendix. Taxation of Benefits Under Special Situations ............................................................ 13
Contacts
Author Contact Information........................................................................................................... 15
Congressional Research Service
Social Security: Calculation and History of Taxing Benefits
T
he Social Security system provides monthly benefits to qualified retirees, disabled
workers, and their spouses and dependents. Before 1984, Social Security benefits were
exempt from the federal income tax. Congress then enacted legislation to tax a portion of
those benefits, with the share gradually increased as a person’s income rose above a specified
income threshold. In 1993, a second income threshold was added that increased the share of
benefits that are taxable. These two thresholds are often referred to as first tier and second tier.
Calculation of Taxable Social Security Benefits
In general, the Social Security and Tier I Railroad Retirement1 benefits of most recipients are not
subject to the income tax. However, up to 85% of Social Security benefits can be included in
taxable income for recipients whose “provisional income” exceeds either of two statutory
thresholds (based on filing status).2
Provisional income is adjusted gross income,3 plus certain otherwise tax-exempt income (taxexempt interest), plus the addition (or adding back) of certain income specifically excluded from
federal income taxation (interest on certain U.S. savings bonds,4 employer-provided adoption
benefits, foreign earned income or foreign housing, and income earned in Puerto Rico or
American Samoa by bona fide residents), plus 50% of Social Security benefits.
The first tier thresholds, below which no Social Security benefits are taxable, are $25,000 for
taxpayers filing as single, head of household, or qualifying widow(er) and $32,000 for taxpayers
filing a joint return. In the case of taxpayers who are married filing separately, the threshold is
also $25,000 if the spouses lived apart all year, but it is $0 for those who lived together at any
point during the tax year.
If provisional income is between the first tier thresholds and the second tier thresholds of $34,000
(for single filers) or $44,000 (for married couples filing jointly), the amount of Social Security
benefits subject to tax is the lesser of (1) 50% of Social Security benefits or (2) 50% of
provisional income in excess of the first threshold.
If provisional income is above the second tier threshold, the amount of Social Security benefits
subject to tax is the lesser of (1) 85% of benefits or (2) 85% of provisional income above the
1
Tier I railroad retirement benefits are paid to a qualified railroad retiree who has met the quarterly work requirements
for Social Security benefit eligibility. The retiree receives Social Security benefits based on the work history that
qualified the retiree for Social Security benefits, and the retiree receives Tier I benefits based on both the Social
Security and railroad work histories. The actual Social Security benefits received are subtracted from this calculation of
Tier I benefits to get actual Tier I benefits. See CRS Report RS22350, Railroad Retirement Board: Retirement,
Survivor, Disability, Unemployment, and Sickness Benefits, by Scott D. Szymendera. In this report, references to Social
Security benefits generally also apply to Tier I benefits.
2
For additional information on calculating taxable Social Security benefits, see U.S. Department of the Treasury,
Internal Revenue Service, “Social Security and Equivalent Railroad Retirement Benefits,” Publication 915, at
http://www.irs.gov/pub/irs-pdf/p915.pdf.
3
Adjusted gross income is the main measure of income used when computing income taxes. The Internal Revenue
Service refers to provisional income as modified adjusted gross income. See Publication 915 for details on the sources
of income included in computing provisional income.
4
Interest on qualified U.S. savings bonds used to pay certain educational expenses is exempt from federal income
taxation.
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Social Security: Calculation and History of Taxing Benefits
second threshold, plus the smaller of (a) $4,500 (for single filers) or $6,000 (for married filers)5
or (b) 50% of benefits.
Because the threshold for married taxpayers filing separately who have lived together any time
during the tax year is $0, the taxable benefits in such a case are the lesser of 85% of Social
Security benefits or 85% of provisional income. None of the thresholds are indexed for inflation
or wage growth. Table 1 summarizes the thresholds and calculation of taxable benefits.
Table 1. Calculation of Taxable Social Security and Tier I Railroad
Retirement Benefits
Taxable Social Security and
Tier I Railroad Retirement Benefits
Provisional Incomea
Single Taxpayer
Less than $25,000
None
$25,000 to $34,000
Lesser of (1) 50% of benefits or
(2) 50% of provisional income above $25,000 (maximum of $4,500)
Over $34,000
Lesser of (1) 85% of benefits or
(2) 85% of provisional income above $34,000 plus amount in box above
Married Taxpayer
Less than $32,000
None
$32,000 to $44,000
Lesser of (1) 50% of benefits or
(2) 50% of provisional income above $32,000 (maximum of $6,000)
Over $44,000
Lesser of (1) 85% of benefits or
(2) 85% of provisional income above $44,000 plus amount in box above
Source: Internal Revenue Service, Publication 915, “Social Security and Equivalent Railroad Retirement
Benefits.”
a.
Provisional income is adjusted gross income plus certain income exclusions plus 50% of Social Security
benefits.
The two examples in Table 2 illustrate how taxable Security benefits may be calculated for a
single retiree in tax year 2014. The retiree is at least 62 years of age and receives $15,000 in
annual Social Security benefits—about the average for a retired worker.6 The examples include
other (non-Social Security) income of $20,000 or $30,000.
5
The $4,500 and $6,000 amounts are the maximum taxes for the first tier calculation, and are equivalent to 50% of the
difference between the first and second tier thresholds.
6
The average monthly Social Security payment for a retired worker in November 2013June 2014 was $1,273.91300. This would be
an annual
payment amount of $15,287600. Information on current monthly benefit payments is available in the Monthly
Statistical Statistical
Snapshot at http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/.
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Social Security: Calculation and History of Taxing Benefits
Table 2. Example of Calculation of Taxable Social Security Benefits for Single Social
Security Recipients with a $15,000 Benefit and Different Levels of Other Income
Step 1: Calculate Provisional Income
Other income
+ 50% of Social Security (assume Social Security benefits are $15,000)
= Provisional income
John
Mary
$20,000
$30,000
$7,500
$7,500
$27,500
$37,500
$25,000
$25,000
$2,500
$9,000
$1,250
$4,500 a
$34,000
$34,000
$0
$3,500
$0
$2,975
$1,250
$7,475
Step 2: Compare Provisional Income to First Tier Threshold
First tier threshold
Excess over first tier threshold
Lesser of
•
Provisional income minus first tier threshold or
•
Difference between first and second tier thresholds [$9,000]
First tier taxable benefits equals
Lesser of
•
50% of benefits or
•
50% of excess over first tier
Step 3: Compare Provisional Income To Second Tier Threshold
Second tier threshold
Calculate excess over second tier
•
Provisional income minus second tier threshold
Second tier taxable benefits
85% of excess
Step 4: Calculate Total Taxable Social Security Benefits
For John: Provisional income is less than $34,000, so total taxable benefits equal first tier
taxable benefits.
For Mary: Provisional income is greater than $34,000, so total taxable benefits equal the lesser
of
•
85% of Social Security benefits (=$12,750) or
•
First tier taxable benefits plus second tier taxable benefits ($4,500 + $2,975=$7,475)
Source: Congressional Research Service (CRS).
a. The maximum amount of first tier taxable benefits is 50% of the difference between the second and first tier
thresholds ($34,000-$25,000=$9,000*50%=$4,500)
The calculation of taxable Social Security benefits depends on the level of benefits and the level
of non-Social Security income. Holding benefits constant, as non-Social Security income
increases, provisional income increases, and therefore the amount of taxable Social Security
benefits increases. Holding non-Social Security income constant, as Social Security benefits
increase, the amount of Social Security benefits that is taxable increases. Those two perspectives
are illustrated in the two figures below. (The figures are for single retirees only, but they would be
similar for married couples.)
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Social Security: Calculation and History of Taxing Benefits
Figure 1 shows taxable Social Security benefits for single retirees with four different amounts of
annual Social Security benefits ($10,000, $15,000, $20,000, and $25,000) as non-Social Security
income increases from zero to $45,000. (Provisional income, which equals non-Social Security
income plus half of Social Security benefits, is not shown directly in the figure.) Once provisional
income exceeds the first tier threshold of $25,000, each additional dollar of non-Social Security
income results in 50 cents of additional taxable income. For example, for someone with Social
Security benefits of $10,000, no benefits are taxable unless non-Social Security income exceeds
$20,000, in which case provisional income would exceed $25,000 (which equals $20,000 plus
half of $10,000).
Once provisional income exceeds the second tier threshold, each additional dollar of non-Social
Security income results in an additional 85 cents of taxable income. As described above, the
second tier threshold occurs when provisional income exceeds $34,000, at which point taxable
Social Security benefits exceed $4,500. In the figure, a horizontal line marks $4,500 of taxable
Social Security benefits.
The amount of Social Security benefits that are taxable continues to increase as non-Social
Security income increases until 85% of Social Security benefits are taxable. After that, the
amount of taxable benefits is constant, as shown by the flat portions of the lines on the right-hand
side of the figure.
Note that the additional tax owed is less than the additional taxable income. The additional tax
owed equals the additional taxable income multiplied by the taxpayer’s marginal tax rate.
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Figure 1. Taxable Social Security Benefits as Annual
Non-Social Security Income Increases
For Single Retirees with Different Amounts of Annual Social Security Benefits
Taxable Social
Security Benefits
$25,000
After 85% of benefits are
taxable, no further increase in
taxable benefits (flat lines)
$20,000
Social Security
Benefits of $25,000
$15,000
Social Security
Benefits of $20,000
$10,000
Social Security
Benefits of $15,000
Social Security
Benefits of $10,000
In second tier, 85% rate applies
(steeper lines)
$5,000
$4,500
of taxable
benefits
In first tier, 50% rate applies
(less steep lines)
$0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Taxable Non-Social Security Income
Source: Congressional Research Service (CRS).
Note: Once provisional income (taxable non-Social Security income plus half of Social Security benefits) exceeds
the first tier threshold of $25,000, each additional dollar of non-Social Security income results in 50 cents of
additional taxable income. Once provisional income exceeds the second tier threshold of $34,000, when taxable
Social Security benefits equal $4,500, each additional dollar of non-Social Security income results in 85 cents of
additional taxable income, reflected in the steeper lines.
Figure 2 shows taxable Social Security benefits for single retirees with three different levels of
non-Social Security income ($20,000, $30,000, and $40,000) as Social Security benefits increase.
(Provisional income, which equals non-Social Security income plus half of Social Security
benefits, is not shown directly in the figure.) For people with $10,000 of Social Security benefits,
those benefits would be untaxed unless non-Social Security income exceeded $20,000, at which
point provisional income would exceed the $25,000 threshold (which equals half of $10,000 plus
$20,000). Depending on the amount of non-Social Security income, the amount of Social Security
benefits that is taxable increases at varying rates as total benefits increase, according to the
taxation of benefit rules described above.
As noted above, the additional tax owed is less than the additional taxable income, because the
additional tax owed equals the additional taxable income multiplied by the taxpayer’s marginal
tax rate.
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Social Security: Calculation and History of Taxing Benefits
Figure 2.Taxable Social Security Benefits as Total Annual
Social Security Benefits Increase
For Single Retirees with Different Amounts of Annual Non-Social Security Income
Taxable Social
Security Benefits
$25,000
$20,000
With $40,000 of Non-Social Security Income
$15,000
$10,000
With $30,000 of Non-Social Security Income
$5,000
With $20,000 of Non-Social Security Income
$0
$0
$2,500
$5,000
$7,500
$10,000
$12,500
$15,000
$17,500
$20,000
$22,500
$25,000
$27,500
$30,000
Total Social Security Benefits
Source: Congressional Research Service (CRS).
Notes: For any fixed amount of non-Social Security income, the amount of taxable Social Security benefits
increases as total Social Security benefits increase. The slope of the lines vary because the amount of Social
Security benefits that is taxable increases at varying rates as total benefits increase.
For the same levels of non-Social Security income and Social Security benefits, a married couple
will have lower taxable Social Security benefits than a single retiree. Consequently, Figures 1
and 2 do not reflect the impact of taxation on a married couple filing a joint tax return.
Special Considerations
There are special considerations in which the application of the taxation of benefits formula may
vary. These include lump sum distributions, repayments, coordination of workers’ compensation,
treatment of nonresident aliens, and withholding from wages. Each of these issues is discussed in
more detail in the Appendix to this report.
State Taxation
Although the Railroad Retirement Act prohibits states from taxing railroad retirement benefits,
including any federally taxable Tier I benefits (45 U.S.C. §231m), states may tax Social Security
benefits. In general, state personal income taxes follow federal taxes. That is, many states use as a
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Social Security: Calculation and History of Taxing Benefits
beginning point for the state income tax calculations either federal adjusted gross income, federal
taxable income, or federal taxes paid. All of these beginning points include the federally taxed
portion of Social Security benefits. States with these beginning points for state taxation must then
make an adjustment, or subtraction from income (or taxes), for railroad retirement benefits. A
state may also make an adjustment for all or part or the federally taxed Social Security benefits.
Some states do not begin the calculation of state income taxes with these federal tax values but
instead begin with a calculation based on income by source. The state may then include part or all
of Social Security benefits7 in the state calculation of income.
As shown in Table 3, 30 states and the District of Columbia fully excluded Social Security
benefits from the state personal income tax. Six states tax all or part of Social Security benefits
but differ from the federal government, and seven states follow the federal government in their
tax treatment of Social Security benefits. The remaining seven states have no personal income
tax.
Table 3. State Income Taxation of Social Security Benefits,Tax Year 2014
Thirty states and the District of
Columbia exempt Social
Security benefits from income
taxation
Alabama, Arizona, Arkansas, California, Delaware, District of Columbia, Georgia,
Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland,
Massachusetts, Michigan, Mississippi, New Hampshire, New Jersey, New York,
North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina,
Tennessee, Virginia, Wisconsin
Six states tax all or part of
Social Security benefits, but not
the same as federal taxation
Colorado, Connecticut, Kansas, Missouri, Montana, Utah
Seven states follow federal
taxation of Social Security
benefits
Minnesota, Nebraska, New Mexico, North Dakota, Rhode Island, Vermont,
West Virginia
States without an income tax
Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming
Source: Rick Olin, Wisconsin Legislative Fiscal Bureau, Individual Tax Provisions in the States, Informational Paper
4, January 2013, available at http://legis.wisconsin.gov/lfb/publications/Informational-Papers/Documents/2013/
4_Individual%20Income%20Tax%20Provisions%20in%20the%20States.pdf .
Note: Before 2014, Iowa taxed some Social Security benefits.
Taxation of Social Security Benefits by Income Level
Because the income thresholds to determine the taxation of Social Security benefits are not
indexed for inflation or wage growth, the share of beneficiaries affected by these thresholds
increases over time. According to theThe Congressional Budget Office (CBO), 39% of Social
projects that in tax year 2014, 49%
of Social Security beneficiaries (16.925.5 million people) werewill be affected by the income taxation of Social
Security benefits in 2005, the most recent year for which the analysis is available
Social Security benefits. That share was
lower in earlier years: 3226% of beneficiaries were affected
by taxation of benefits in 2000 and 26%
were affected in 1998.8
1998, 34% were affected in 2000, and 39% in 2005.8
7
States that chose to tax Social Security benefits generally tax up to the federally taxed amount.
Estimates provided by CBO for other years were originally reported in the Green Book, Committee on Ways and
Means, U.S. House of Representatives (1998, 2000, and 2008 editions). Changes from year to year may also reflect
changes to CBO’s methodology and data sources over time.
8
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The number of tax returns with taxable Social Security benefits has increased substantially since
2005. In 2011, the most recent year for which data are available, 16.8 million returns reported
taxable benefits. That was 32% more than in 2005, when there were 12.7 million returns with
taxable Social Security benefits.9 (The number of returns does not match the number of individual
beneficiaries because many returns include married couples.)
Table 4 shows CBO’s estimates, under 2005 law and income levels,Table 4 shows CBO’s estimates for tax year 2014 of the number of Social
Security beneficiaries
and of the number and share of beneficiaries affected by the taxation of
Social Security benefits, by level of income (cash income for the tax unit plus capital gains
realizations). As shown in Table 4, the percentage of Social Security beneficiaries affected
increases with income. Less than 1% of beneficiaries with income under $30,000 had taxable
Social Security benefits, but more than 90% of those with income of $40,000 or more paid taxes
on their benefits.
Table 4.
by level of income. The percentage of Social Security beneficiaries affected increases sharply
with income.
Table 4. Projected Number and Percentage of Beneficiaries
with Taxable Social Security
Benefits by Income Class Under 2005 Law and Income Levels, 2014
Number of Social
Security Beneficiaries
(thousandsmillions)
Number of Beneficiaries
Affected by Taxation
(thousandsmillions)
Percentage of
Beneficiaries Affected
by Taxation
Less than $10,000
5,957
0
0.0%3.5
a
a
$10,000 - $15,000
5,201
4
0.1%4.6
a
a
$15,000 - $20,000
3,688
12
0.3%4.4
a
a
$20,000 - $25,000
3,347
11
0.3%.3
a
a
$25,000 - $30,000
2,917
76
2.63.0
0.1
2%
$30,000 - $40,000
5,260
1,478
28.1.6
1.5
26%
$40,000 - $50,000
4,497
3,168
70.4.5
2.6
57%
$50,000 - $100,000
8,931
8,578
96.0%
Over $100,000
3,632
3,607
99.3%
43,429
16,934
39.014.6
13.4
92%
Over $100,000
8.0
7.9
99%
51.5
25.5
49%
Income Class
Total
Source: Congressional Budget Office simulations based on Statistics of Income data from the Internal Revenue
Service, supplemented by data from the Current Population Survey.
Notes: Income is defined as adjusted gross income plus statutory adjustments, tax-exempt interest, and
nontaxable Social Security benefits. Number of Social Security beneficiaries includes beneficiaries under and over
the age of 65.
Table 5 shows the impact of rising income on the share of benefits that are taxed for the U.S.
taxpayers in 2005. Income includes cash income plus capital gains realizations. As shown in
Table 5, as income increases, taxes as a percentage of Social Security benefits rises.
9
Internal Revenue Service, “SOI [Statistics of Income] Tax Stats - Individual Statistical Tables by Size of Adjusted
Gross Income,” Table 1.4: All Returns: Sources of Income, Adjustments, and Tax Items, available at
http://www.irs.gov/uac/SOI-Tax-Stats—Individual-Statistical-Tables-by-Size-of-Adjusted-Gross-Income
a.
Less than 50,000 people or less than 0.5%.
Table 5 shows how the share of benefits that are taxes increases with income.
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Table 5. Projected Social Security Benefits and
Taxes on Social Security Benefits
by Income Class Under 2005 Law and Income Levels, 2014
Social Security
Benefits
(in millionsbillions)
Taxes on Social
Security Benefits
(in millionsbillions)
Taxes as a
Percentage
of Benefits
Less than $10,000
$40,403
$0
0.0%26.0
a
a
$10,000 - $15,000
$53,769
$1
0.0%.6
a
a
$15,000 - $20,000
$40,480
$4
0.0%64.0
a
a
$20,000 - $25,000
$36,927
$9
0.0%48.2
a
a
$25,000 - $30,000
$33,009
$17
0.1%43.6
a
a
$30,000 - $40,000
$59,893
$390
0.7%84.7
$0.4
a
$40,000 - $50,000
$51,717
$1,412
2.7%71.1
$1.5
2
$50,000 - $100,000
$110,421
$11,508
10.4%
Over $100,000
$49,378
$10,767
21.8%
$475,997
$24,107
5.1%
Income Class
Total
234.1
$20.6
9
Over $100,000
$137.3
$28.8
21
Total
$762.5
$51.3
7%
Income Class
Source: Congressional Budget Office simulations based on Statistics of Income data from the Internal Revenue
Service, supplemented by data from the Current Population Survey.
Notes: Income is defined as adjusted gross income plus statutory adjustments, tax-exempt interest, and
nontaxable Social Security benefits. Number of Social Security beneficiaries includes beneficiaries under and over
the age of 65.
a.
Less than $50 million or less than 0.5%.
Impact on the Trust Funds
The proceeds from taxing Social Security and Railroad Retirement benefits at the 50% rate are
credited to the Social Security’s two trust funds—the Old-Age and Survivors Insurance (OASI)
and Disability Insurance (DI) trust funds—and to the Railroad Retirement system, on the basis of
the source of the benefits taxed. Proceeds from taxing benefits at higher rates are credited to
Medicare’s Hospital Insurance (HI) trust fund.
In 2013, the OASI and DI trust funds were credited with $21.1 billion from taxation of benefits,
or 2.5% of the funds’ total income.109 Income from the taxation of benefits in the HI fund in 2013
was $14.3 billion, or 5.7% of total HI fund income.1110
Because the income thresholds used to determine the share of benefits that is taxable are not
indexed for inflation or wage growth, income taxes on benefits will become an increasingly
important source of tax revenues for Social Security and Medicare. The Social Security and
Medicare trustees project that over the next 75 years, income taxes will grow from 4% of total
Social Security tax revenue to 7%.12 For Medicare, they are projected to increase from 7% to 13%
10Currently, about 30% of
9
Social Security Administration, Trust Fund Financial Data, http://www.ssa.gov/OACT/ProgData/allOps.html. Of the
$21.1 billion, $20.7 billion was credited to the OASI trust fund and $0.4 billion to the DI trust fund.
1110
Congressional Research Service calculation based on Department of the Treasury, Monthly Reports of the Hospital
Insurance Trust Fund, at http://www.treasurydirect.gov/govt/reports/tfmp/hospins/hospins.htm.
12
Social Security Administration, Office of the Chief Actuary, “Components of Annual Income Rates—2013 OASDI
Trustees Report,” at http://www.ssa.gov/oact/TR/2013/lr4b10.html.
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of total tax revenues.13 (The rest of Social Security and Medicare tax revenue comes from the
payroll taxes for those programs.) Revenue from taxation of benefits will be a smaller share of
total program revenues, because in addition to tax revenue, both programs receive interest on trust
fund balances, and Medicare receives income from
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Social Security benefits are subject to income tax. That share will increase to about 50% over the
next 25 years, CBO estimates.11
The Social Security and Medicare trustees project that over the next 20 years, income taxes will
grow from 4% of total Social Security tax revenue to 6% and that the share will grow slightly in
later decades, approaching 7% by 2090.12 For Medicare, they are projected to increase from 8%
of total tax revenues this year to about 14% in 2040 and later.13 (The rest of Social Security and
Medicare tax revenue comes from the payroll taxes for those programs.) Revenue from taxation
of benefits will be a smaller share of total program revenues, because in addition to tax revenue,
both programs receive interest on trust fund balances, and Medicare receives income from
premiums and from general revenue.
History of Taxing Social Security Benefits
Until 1984, Social Security benefits were exempt from the federal income tax. The exclusion was
based on rulings made in 1938 and 1941 by the Department of the Treasury, Bureau of Internal
Revenue (the predecessor of the Internal Revenue Service). The 1941 Bureau ruling on Social
Security payments viewed benefits as being for general welfare and reasoned that subjecting the
payments to income taxation would be contrary to the purposes of Social Security.14
Under these rules, the treatment of Social Security benefits was similar to that of certain types of
government transfer payments (such as Aid to Families with Dependent Children (AFDC),
Supplemental Security Income (SSI), and benefits under the Black Lung Benefits Act). This was
in sharp contrast to then-current rules for retirement benefits under private pension plans, the
federal Civil Service Retirement System (CSRS), and other government pension systems.15
Benefits from those pension plans were fully taxable, except for the portion of total lifetime
benefits (using projected life expectancy) attributable to the employee’s own contributions to the
system (and on which he or she had already paid income tax).
Currently (and as in 1941), under Social Security the worker’s contribution to the system is half
of the payroll tax, officially known as the Federal Insurance Contributions Act (FICA) tax. The
amount the worker pays into the Social Security system in FICA taxes is not subtracted to
determine income subject to the federal income tax, and is therefore taxed. The employer’s
contributions to the system are not considered part of the employee’s gross income, and are
deductible from the employer’s business income as a business expense. Consequently, neither the
employee nor the employer pays taxes on the employer’s contribution.16
The 1979 Advisory Council on Social Security concluded that because Social Security benefits
are based on earnings in covered employment, the 1941 ruling was wrong and that the tax
treatment of private pensions was a more appropriate model for tax treatment of Social Security
benefits.17 The council estimated that the most anyone who entered the workforce in 1979 would
13
11
Congressional Budget Office, The 2014 Long-Term Budget Outlook, July 2014, p.66, at http://cbo.gov/sites/default/
files/cbofiles/attachments/45471-Long-TermBudgetOutlook.pdf.
12
Social Security Administration, Office of the Chief Actuary, “Components of Annual Income Rates—Consistent
with 2014 OASDI Trustees Report,” at http://www.ssa.gov/oact/TR/2014/lr4b10.html.
13
Center for Medicare and Medicaid Services, Office of the Actuary, “Medicare Sources of Income as a Percentage of
Total Income,” in 20132014 Expanded and Supplementary Tables to the 20122014 Medicare Trustees Report, at
http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/
index.html.
14
U.S. Congress, Senate Committee on Finance, Tax Free Status of Social Security Benefits, report to accompany
S.Res. 87, S.Rept. 97-135, June 15, 1981.
15
Most federal civilian employees hired before 1984 are covered by CSRS; those hired later are covered by the Federal
Employees’ Retirement System (FERS). See CRS Report 98-810, Federal Employees’ Retirement System: Benefits and
Financing, by Katelin P. Isaacs.
16
Under the Self-Employment Contributions Act (SECA), self-employed workers pay the full 12.4% payroll tax, but to
ensure parity with FICA, half of those payments are exempt from income tax.
17
U.S. Congress, Senate, Select Committee on Aging, Hearings Before the Committee on Retirement Income And
Employment, Oversight on Recommendations of the 1979 Social Security Advisory Council, Statement of Henry Aaron,
Chairman of the Advisory Council on Social Security, report. no. 96-230, March 11 and 13, 1980, p. 13.
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deductible from the employer’s business income as a business expense. Consequently, neither the
employee nor the employer pays taxes on the employer’s contribution.16
The 1979 Advisory Council on Social Security concluded that because Social Security benefits
are based on earnings in covered employment, the 1941 ruling was wrong and that the tax
treatment of private pensions was a more appropriate model for tax treatment of Social Security
benefits.17 The council estimated that the most anyone who entered the workforce in 1979 would
pay in payroll taxes during his or her lifetime would equal 17% of the Social Security benefits he
or she would ultimately receive. (This was the most any individual would pay; in the aggregate,
workers would make payroll tax payments amounting to substantially less than 17% of their
ultimate benefits.) Because of the administrative difficulties involved in determining the taxable
amount of each individual benefit and to avoid “taxing more of the benefit than most people
would consider appropriate,” the council recommended instead that half of everyone’s benefit be
taxed. They justified this ratio as a matter of “rough justice” and noted that it coincided with the
portion of the tax (the employer’s share) on which income taxes had not been paid.18 This
position to tax Social Security benefits was in contrast to the position of the National Commission
on Social Security, established by Congress in the Social Security Amendments of 1977 (P.L. 95216). The commission did not, in its 1981 final report, include a recommendation to tax Social
Security benefits.
The National Commission on Social Security Reform (often referred to as the “Greenspan
Commission”), appointed by President Reagan in 1981, recommended in its 1983 report that,
beginning in 1984, 50% of Social Security cash benefits and Railroad Retirement Tier I benefits
be taxable for individuals whose adjusted gross income, excluding Social Security benefits,
exceeded $20,000 for a single taxpayer and $25,000 for a married couple, with the proceeds of
such taxation credited to the Social Security trust funds.19 The commission did not include any
provisions for indexing the thresholds. The commission estimated that 10% of Social Security
beneficiaries would be subject to taxation of benefits. The commission acknowledged that the
proposal had a “notch” problem, in that people with income at the thresholds would pay
significantly higher taxes than those with only one dollar less, but trusted that it would be
rectified during the legislative process.
In enacting the 1983 Social Security Amendments (P.L. 98-21), Congress adopted the
commission’s recommendation to tax Social Security benefits, but with a formula that gradually
increased the taxable share as a person’s income rose above the thresholds, up to a maximum of
50% of benefits. The formula calculated taxable benefits as the lesser of 50% of benefits or 50%
of the excess of the taxpayer’s provisional income over thresholds of $25,000 (for single filers)
and $32,000 (for married filers). Provisional income equaled adjusted gross income plus taxexempt interest plus certain income exclusions plus 50% of Social Security benefits.
16
Under the Self-Employment Contributions Act (SECA), self-employed workers pay the full 12.4% payroll tax, but to
ensure parity with FICA, half of those payments are exempt from income tax.
17
U.S. Congress, Senate, Select Committee on Aging, Hearings Before the Committee on Retirement Income And
Employment, Oversight on Recommendations of the 1979 Social Security Advisory Council, Statement of Henry Aaron,
Chairman of the Advisory Council on Social Security, report. no. 96-230, March 11 and 13, 1980, p. 13.
18
Social Security Administration, Social security financing and benefits, Report of the 1979 Advisory Council, 1981,
pp.64-65.
19
Social Security Administration, Report of the National Commission on Social Security Reform, January 1983, pp. 210 through 2-11, available at http://www.ssa.gov/history/reports/gspan.html.
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In 1993, the Social Security Administration’s Office of the Actuary estimated that, if pension tax
rules were applied to Social Security, the ratio of total employee Social Security payroll taxes to
expected benefits for current recipients (in 1993) would be approximately 4% or 5%. The
actuarial estimates were that for workers just entering the workforce, the ratio would be, on
average, about 7%.20 Because Social Security benefits replaced a higher proportion of earnings of
workers who were lower paid and had dependents, and because women had longer life
expectancies, the workers with the highest ratio of taxes to benefits would be single, highly paid
males. The estimated ratio for these workers (highly paid males) entering the workforce in 1993
was 15%.
18
Social Security Administration, Social security financing and benefits, Report of the 1979 Advisory Council, 1981,
pp.64-65.
19
Social Security Administration, Report of the National Commission on Social Security Reform, January 1983, pp. 210 through 2-11, available at http://www.ssa.gov/history/reports/gspan.html.
20
Unpublished memo from Steve Goss, Social Security Office of the Actuary, November 19, 1993. The ratios were
computed using nominal dollar values for both taxes and benefits.
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Applying the tax rules for private and public pensions presents practical administrative problems.
Determining the proper exclusion would be complex for several reasons, including the difficulty
of calculating the ratio of contributions to benefits for each individual when several people may
receive benefits on the basis of the same worker’s account.
President Clinton proposed (as part of his FY1994 budget proposal) that the portion of Social
Security benefits subject to taxation be increased from 50% to 85%, effective in tax year 1994. As
under then-current law, only Social Security recipients whose provisional income exceeded the
thresholds of $25,000 (for single filers) and $32,000 (for married filers) were to pay taxes on their
benefits. Also as under then-current law, the first step was to add 50%, not 85%, of benefits to
adjusted gross income. Because the thresholds and definition of provisional income did not
change, the measure would only affect recipients already paying taxes on benefits. However, the
ratio used to compute the amount of taxable benefits was increased from 50% to 85%. Taxing no
more than 85% of Social Security benefits (the estimated portion not based on contributions by a
recipient, including highly paid males) would ensure that no one would have a higher percentage
of Social Security benefits subject to tax than if the tax treatment of private and civil service
pensions were actually applied.
The proceeds from the increase (from 50% to 85%) were slated to be credited to the Medicare
Hospital Insurance program, which had a less favorable financial outlook than Social Security.
Doing so also avoided possible procedural obstacles (budget points of order that can be raised
regarding changes to the Social Security program in the budget reconciliation process). This
measure was included in the 1993 Omnibus Budget Reconciliation Act (OBRA), which passed
the House on May 27, 1993.
The Senate version of the bill included a provision to tax Social Security benefits up to 85% but
imposed it only after provisional income exceeded new thresholds of $32,000 (for single filers)
and $40,000 (for married filers). When the House and Senate versions of the budget package
were negotiated in conference, the conference agreement adopted the Senate version of the
taxation of Social Security benefits provision and raised the thresholds to $34,000 (for single
filers) and $44,000 (for married filers). President Clinton signed the measure into law (as part of
P.L. 103-66) on August 10, 1993. Although other changes in tax law have since affected the
amount of taxes paid on Social Security benefits, there have been no direct legislative changes
regarding taxation of Social Security benefits since 1993.
20
Unpublished memo from Steve Goss, Social Security Office of the Actuary, November 19, 1993. The ratios were
computed using nominal dollar values for both taxes and benefits.
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Appendix. Taxation of Benefits Under
Special Situations
Lump Sum Distributions
A Social Security beneficiary may receive a lump sum distribution of benefits owed for one or
more prior years.21 In this situation, a beneficiary may choose between two methods for
calculating the taxable portion of the lump-sum distribution: (1) include all of the benefits for
prior years in calculating the taxable benefits for the current year or (2) re-calculate the prior year
taxable benefits using prior year income and take the difference between the recalculated taxable
benefits and the taxable benefits reported in each prior year. In either case, the additional taxable
benefits are included in taxable income for the current year. In computing the taxable portion of
benefits in prior years, some income sources generally excluded from the provisional income
calculation are included.22
Repayments
Sometimes a Social Security beneficiary must repay a prior overpayment of benefits. In this case,
the calculation of taxable Social Security benefits is based on the net benefits—gross benefits less
the repayment—even if the repayment is for a benefit received in a previous year. For married
taxpayers filing a joint return, net benefits equal the sum of the couple’s Social Security gross
benefits less the repayment.
If, however, the repayment results in negative net Social Security benefits, there are two
consequences: (1) there are no taxable benefits and (2) the taxpayer may take a miscellaneous
deduction as part of itemized deductions or a credit for the negative net Social Security benefits.23
Coordination of Workers’ Compensation
For individuals under the full retirement age, Social Security benefits are reduced by a portion of
any workers’ compensation payments (or payments from some other public disability program)
received by the individual. Workers’ compensation is generally not taxable. Any reduction in
Social Security benefits due to the receipt of workers’ compensation is still considered to be a
Social Security benefit, however, so income taxes are computed based on the full (unreduced)
benefit amount.24
21
An individual originally denied benefits, but approved on appeal, may receive a lump sum amount for the period
when benefits were denied (which may be prior years). See Internal Revenue Service, Publication 915, “Lump-Sum
Election.” This is not the lump-sum death benefit, which is not subject to federal income tax.
22
See “Lump-Sum Election” in Internal Revenue Service, Publication 915.
23
Miscellaneous itemized deductions are subject to a 2% floor. That is, they are included in itemized deductions to the
extent they exceed 2% of adjusted gross income. For details on the repayment computations, see Internal Revenue
Service, Publication 915, “Repayments More Than Gross Benefits.”
24
Section 86(d)(3) of the Social Security Act; see also United States Tax Court, T.C. Memo. 2012-249, August 28,
2012, at http://www.ustaxcourt.gov/InOpHistoric/moorermemo.TCM.WPD.pdf., and United States Tax Court, T.C.
Summary Opinion 2014-66, July 10, 2014, at https://www.ustaxcourt.gov/InOpHistoric/
(continued...)
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Treatment of Nonresident Aliens
Citizenship is not required for receipt of Social Security benefits. Nonresident aliens may receive
benefits provided they have engaged in covered employment and otherwise meet eligibility
requirements. In general, 85% of the Social Security benefits for nonresident aliens is taxable
(i.e., none of the thresholds apply) at a 30% rate. However, there are a number of exceptions to
this general rule on the basis of tax treaties such that nonresident aliens or U.S. citizens living
abroad may not have U.S. Social Security benefits subject to U.S. income taxes.25
Withholding
In general, withholding for a wage earner is based on the estimated income taxes for a full year of
earnings at the periodic (weekly, bi-weekly, monthly, etc.) rate. Taxable Social Security benefits,
and the associated taxes, are based on the amount of non-Social Security income earned by a
recipient during the tax year. The Social Security Administration, without knowledge about the
amount of other income received by a beneficiary, is unable to properly determine the amount of
taxes that should be withheld from Social Security benefits. Like other taxpayers, Social Security
recipients can make quarterly estimated income tax payments. The Uruguay Round Agreements
Act (P.L. 103-465) amended the Internal Revenue Code (IRC) to allow individuals to request that
monies be withheld from certain federal payments to satisfy their income tax liability; this is
commonly referred to as voluntary tax withholding. An amendment to Section 207 of the Social
Security Act allowed this voluntary tax withholding from Social Security benefits.26 Voluntary tax
withholding became effective with payments issued in February 1999.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16)
permitted voluntary withholding from Social Security benefits at rates of 7%, and equal to the
bottom three tax bracket tax rates (currently 10%, 15%, and 25%). The Tax Relief,
Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312) extended
the EGTRRA provisions to tax year 2012. The American Taxpayer Relief Act of 2012 (ATRA;
P.L. 112-240) made the EGTRRA provisions permanent.
Aliens residing outside the United States are subject to different tax withholding rules. Section
871 of the Internal Revenue Code imposes a 30% tax withholding rate on almost all of the U.S.
income of nonresident aliens, unless a lower rate is fixed by treaty. Thus, 30% of 85% (or 25.5%)
of a nonresident alien’s Social Security benefits may be withheld for federal income taxes.
25
(...continued)
EnglishSummary.Gerber.SUM.WPD.pdf.
25
Internal Revenue Service, Publication 915, “Nonresident aliens,” provides a list of the countries whose citizens (as
nonresident aliens) are exempt from U.S. income taxes on Social Security benefits, and countries where residing U.S.
citizens are exempt.
26
Because they are not subject to the federal income tax, Supplemental Security Income payments, Black Lung
payments, Medicare premium refunds, Lump Sum Death Payments, returned check re-issuances, and benefits due
before January 1984 are not subject to voluntary tax withholding.
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Author Contact Information
Noah P. Meyerson
Analyst in Income Security
nmeyerson@crs.loc.gov, 7-4681
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