Social Security: Calculation and History of
Taxing Benefits
Christine Scott
Specialist in Social Policy
February 20, 2013
Congressional Research Service
7-5700
www.crs.gov
RL32552
CRS Report for Congress
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epared for Members and Committees of Congress
Social Security: Calculation and History of Taxing Benefits
Summary
Social Security provides monthly benefits to qualified retirees, disabled workers, and their
spouses and dependents. Until 1984, Social Security benefits were exempt from the federal
income tax. In 1983, Congress approved recommendations from the National Commission on
Social Security Reform (also known as the Greenspan Commission) to tax Social Security
benefits above a specified income threshold. Specifically, beginning in 1984, up to 50% of Social
Security and Railroad Retirement Board (RRB) Tier 1 benefits are taxable for individuals whose
provisional income exceeds $25,000. The threshold is $32,000 for married couples. Provisional
income is defined as the total income from all sources recognized for tax purposes plus certain
otherwise tax-exempt income, including half of Social Security and RRB Tier 1 benefits. The
proceeds from taxing Social Security and Railroad Retirement Tier I benefits at 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, Congress passed a second income threshold for the calculation of taxable Social Security
and RRB Tier I benefits. This second threshold (often referred to as Tier 2) 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 tax proceeds from the second tier go to the
Medicare Hospital Insurance (HI) Trust Fund.
Income from taxation of benefits to the Social Security trust funds totaled $23.8 billion in 2011,
or 3.0% of its total income. For Medicare, income from taxation of benefits totaled $15.1 billion
in 2011, or 2.8% of total HI trust fund income. 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 is expected to increase over time. According to the
Congressional Budget Office (CBO), 39% of (or 16.9 million) Social Security beneficiaries were
affected by the income taxation of Social Security benefits in 2005.
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Social Security: Calculation and History of Taxing Benefits
Contents
Calculation of Taxable Social Security Benefits .............................................................................. 1
Special Considerations .............................................................................................................. 4
State Taxation ............................................................................................................................ 5
Impact on the Trust Funds ......................................................................................................... 9
History of Taxing Social Security Benefits ...................................................................................... 9
Figures
Figure 1. Taxable Social Security Benefits as Non-Social Security (and Provisional)
Income Increases for a Single Retiree with $15,139 in Annual Social Security Benefits,
Tax Year 2012 ............................................................................................................................... 4
Figure 2. Taxable Income for an Average Single Retiree ................................................................ 7
Figure 3. Taxable Income for a Single Retiree with $20,000 or $30,000 in Non-Social
Security Income as Annual Social Security Benefits Increase, Tax Year 2012 ............................ 8
Tables
Table 1. Calculation of Taxable Social Security and Tier I Railroad Retirement Benefits ............. 2
Table 2. Example of Calculation of Social Security Benefits for Average Social Security
Recipient and Different Assumptions about Other Income .......................................................... 3
Table 3. State Income Taxation of Social Security Benefits, Tax Year 2011 ................................... 5
Table 4. Number and Percentage of Beneficiaries with Taxable Social Security Benefits
by Income Class Under 2005 Law and Income Levels ................................................................ 6
Table 5. Social Security Benefits and Taxes on Social Security Benefits by Income Class
Under 2005 Law and Income Levels ............................................................................................ 9
Appendixes
Appendix. Special Considerations Under Taxation of Benefits..................................................... 13
Contacts
Author Contact Information........................................................................................................... 15
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Social Security: Calculation and History of Taxing Benefits
he Social Security system provides monthly benefits to qualified retirees, disabled
workers, and their spouses and dependents. Until 1984, Social Security benefits were
Texempt from the federal income tax. Then in 1984, Congress enacted legislation to begin
to tax Social Security benefits with a formula for determining taxable benefits that 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 Tier 1 and Tier 2.
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 and Tier I Railroad Retirement
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 total income,3 plus certain otherwise tax-exempt income (tax-exempt
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), and plus one-half (50%) of Social Security and Tier I Railroad Retirement
benefits.
The thresholds below which no Social Security or Tier I 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. A taxpayer who is married filing separately who has lived apart from his or
her spouse all tax year has a threshold amount of $25,000. A taxpayer who is married filing
separately who lived with his or her spouse at any point during the tax year, has a threshold
amount of $0.
If provisional income is between the first tier thresholds of $25,000 (single) or $32,000 (married
couple) and the second tier thresholds of $34,000 (single) or $44,000 (married couple), the
amount of Social Security and Tier I benefits subject to tax is the lesser of (1) one-half (50%) of
Social Security and Tier I benefits; or (2) one-half (50%) of provisional income in excess of the
first threshold.
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 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.
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, 2006,
available online at http://www.irs.gov/pub/irs-pdf/p915.pdf.
3 Total income is the total of income from all sources recognized for tax purposes. 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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If income is above the second tier threshold, the amount of Social Security and Tier I Railroad
Retirement benefits subject to tax is the lesser of (1) 85% of Social Security and Tier I benefits; or
(2) 85% of provisional income above the second threshold, plus the smaller of (a) $4,500 (single)
or $6,000 (married couple);5 or (b) one-half (50%) of Social Security and Tier I benefits.
Because the threshold for a married taxpayer filing separately who has lived with his or her
spouse at any time during the tax year is $0, the taxable benefits in such a case are the lesser of
85% of Social Security and Tier I 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 Social Security and Tier I Railroad Retirement benefits.
Table 1. Calculation of Taxable Social Security and Tier I Railroad
Retirement Benefits
Calculation of Taxable Social Security and Tier I Railroad
Provisional Incomea
Retirement Benefits
Single Taxpayer
Less than $25,000
No taxable Social Security or Tier I Railroad Retirement benefits
$25,000 less than $34,000
Lesser of (1) 50% of Social Security and Tier I benefits; or
(2) 50% of provisional income above $25,000
$34,000 and over
Lesser of (1) 85% of Social Security and Tier I benefits; or
(2) 85% of provisional income above $34,000 plus lesser of
(A) $4,500; or
(B) 50% of Social Security and Tier I benefits
Married Taxpayer
Less than $32,000
No taxable Social Security or Tier I Railroad Retirement benefits
$32,000 less than $44,000
Lesser of (1) 50% of Social Security benefits; or
(2) 50% of provisional income above $32,000
$44,000 and over
Lesser of (1) 85% of Social Security benefits; or
(2) 85% of provisional income above $44,000 plus lesser of
(A) $6,000; or
(B) 50% of Social Security and Tier I benefits
Source: Table prepared by the Congressional Research Service (CRS).
a. Provisional income is total income plus certain income exclusions plus one-half (50%) of Social Security
benefits
The following two examples in Table 2 illustrate how taxable Security benefits may be calculated
for a single retiree in tax year 2012. The retiree is at least 62 years of age, and receives $15,139in
5 The $4,500 (single) and $6,000 (married couple) amounts are the maximum taxes for the Tier I calculation, and are
equivalent to one-half (50%) of the difference between the first and second tier thresholds.
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annual Social Security benefits—the average in December 2012 for a retired worker.6 The
examples include other (non-Social Security) income of $20,000 or $30,000.
Table 2. Example of Calculation of Social Security Benefits for Average Social
Security Recipient and Different Assumptions about Other Income
Step 1: Calculate Provisional Income
John
Mary
Other income
$20,000 $30,000
+ 50% of Social Security (assume Social Security benefits are $15,139)
$7,570
$7,570
= Provisional income
$27,570 $37,570
Step 2: Compare Provisional Income to 1st Tier Threshold
First tier threshold
$25,000 $25,000
Calculate Excess over First Tier Threshold
$2,570 $9,000a
Lesser of
•
Provisional income minus first tier threshold or
•
Difference between first and second tier thresholds [$9,000]
First tier taxable benefits Equals
$1,285 $4,500
Lesser of
•
50% of Social Security or tier I benefits or
•
50% of excess over first tier
Step 3: Compare Prov. Income To 2nd Tier Threshold
Second tier threshold
$34,000 $34,000
Calculate Excess over second tier
•
Provisional income minus second tier threshold
$0
$3,570
Second tier taxable benefits
85% of excess
$0
$3,034
Step 4: Calculate Total Taxable Social Security Benefits
If provisional income is less than $34,000, total taxable benefits equal first tier taxable benefits.
$1,026 $7,095
If provisional income is greater than $34,000, total taxable benefits equal the lesser of
•
85% of Social Security benefits (=$12,868) or
•
First tier taxable benefits plus second tier taxable benefits
Source: Table prepared by the 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)
Figure 1 shows taxable Social Security benefits for a single retiree with Social Security benefits
of 15,139 as non-Social Security income (and provisional income) increases. Shown on the figure
is the point at which taxable benefits are calculated using the Tier 2 formula in which the
6 The average monthly OASI payment for a retired worker in December 2012 was $1,261.61. This would be an annual
payment amount of $15,139. Information on current monthly benefit payments is available by accessing beneficiary
databases at http://www.ssa.gov/OACT/ProgData/icp.html.
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comparisons in the formula use a ratio of 85% (rather than the 50% ratio for Tier 1). At this point,
each additional dollar of non-Social Security income results in a larger increase in taxable Social
Security benefits (because of the ratio change from 50% to 85% in the calculations). In Figure 1,
the taxable Social Security benefits reach a maximum of 85% of Social Security benefits
(illustrated by a flattening of the line) when non-Social Security income equals $34,000 in this
example.
Figure 1. Taxable Social Security Benefits as Non-Social Security (and Provisional)
Income Increases for a Single Retiree with $15,139 in Annual Social Security
Benefits, Tax Year 2012
Source: Figure prepared by the Congressional Research Service (CRS).
The calculation of taxable Social Security benefits depends on the level of benefits, the tax filing
status, and non-Social Security income. Holding non-Social Security income constant, as benefits
increase, taxable Social Security benefits will 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, Figure 1 does not reflect other levels of benefits, or
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,
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treatment of non-residential 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), states may tax Social Security benefits. In
general, state personal income taxes follow federal taxes. That is, many states use as a 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.
In tax year 2011, 30 of the states (and the District of Columbia) with a personal income tax fully
excluded Social Security benefits from the state personal income tax. Fourteen states tax all, or
part, of Social Security benefits, with 8 states following the federal taxation of Social Security
benefits. Table 3 identifies what states fall into each of these categories for tax year 2011.
Table 3. State Income Taxation of Social Security Benefits, Tax Year 2011
States taxing all or part of Social Security benefits, but Colorado, Connecticut, Iowa, Kansas, Missouri, Montana
not the same as federal taxation
States following federal taxation of Social Security
Minnesota, Nebraska, New Mexico, North Dakota, Rhode
benefits
Island, Utah, Vermont, West Virginia
Source: Rick Olin, Wisconsin Legislative Fiscal Bureau, Individual Tax Provisions in the States, July, 2012, available
at http://legis.wisconsin.gov/lfb/publications/Miscellaneous/Documents/
2012_07_25Individual%20Income%20Tax%20Provisions%20in%20the%20States.pdf.
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 is
increasing over time. According to the Congressional Budget Office (CBO), 39% of (or 16.9
million) Social Security beneficiaries were affected by the income taxation of Social Security
benefits in 2005. This compares with 32% of Social Security beneficiaries affected by taxation of
benefits in 2000 and 26% in 1998.8
Table 4 shows the CBO estimates, under 2005 law and income levels, of the number of Social
Security beneficiaries, the number of beneficiaries affected by the taxation of Social Security
benefits, and the percentage of beneficiaries affected by taxation 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 the income level, with more than 90% of
7 States that chose to tax Social Security benefits, generally tax up to the federally taxed amount.
8 CBO estimates are 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.
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beneficiaries with an income of $40,000 or more affected by the taxation of Social Security
benefits.
Table 4. Number and Percentage of Beneficiaries with Taxable Social Security
Benefits by Income Class Under 2005 Law and Income Levels
Number of Social
Number of Beneficiaries
Percentage of
Level of Income
Security Beneficiaries
Affected by Taxation
Beneficiaries Affected
(in thousands)
(in thousands)
by Taxation
Less than $10,000
5,957
0
0.0%
$10,000 - $15,000
5,201
4
0.1%
$15,000 - $20,000
3,688
12
0.3%
$20,000 - $25,000
3,347
11
0.3%
$25,000 - $30,000
2,917
76
2.6%
$30,000 - $40,000
5,260
1,478
28.1%
$40,000 - $50,000
4,497
3,168
70.4%
$50,000 - $100,000
8,931
8,578
96.0%
Over $100,000
3,632
3,607
99.3%
Total 43,429
16,934
39.0%
Source: Congressional Budget Office simulations based on data from the Statistics of Income and supplemented
by data from the Current Population Survey.
Notes: Income is defined as AGI plus statutory adjustments, tax-exempt interest, and nontaxable Social Security
benefits. Number of Social Security beneficiaries includes beneficiaries under and over age 65.
As previously noted, because of the thresholds not all Social Security benefits are taxable. Figure
2 shows how Social Security benefits impact taxable income for a given level of Social Security
benefits ($15,139) for a single retiree in tax year 2012.9 As non-Social Security income increases,
more of Social Security benefits become taxable. This leads to an increase in overall taxable
income. Because the taxation of Social Security benefits is capped at 85% in the second tier, the
darkly shaded area in Figure 2 shows that the amount of Social Security benefits that are taxed
remains constant as non-Social Security income increases beyond the second threshold.
9 All tax calculations for this report are estimated by CRS. The taxpayer is assumed to have used the standard
deduction, including the additional amount for the elderly and disabled.
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Figure 2. Taxable Income for an Average Single Retiree
(Tax Year 2012)
Source: Figure prepared by the Congressional Research Service (CRS).
Figure 3 shows how different levels of Social Security benefits affect taxable income for a single
retiree with either $20,000 or $30,000 in non-Social Security income.10 In Figure 3, the Social
Security benefits increase until they reach the annual maximum benefits for a person receiving
benefits at the age of 66 in 2012—$30,156.
10 Ibid.
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Figure 3. Taxable Income for a Single Retiree with $20,000 or $30,000 in Non-Social
Security Income as Annual Social Security Benefits Increase, Tax Year 2012
Source: Figure prepared by the Congressional Research Service (CRS).
Note: Assumes Social Security benefits increase to $30,156the maximum benefit in 2012 for a person retiring in
2012 at the age of 66.
Table 5 shows the impact of rising income on the share of benefits that are taxed for the U.S.
taxpayers in 2005. Level of income includes cash income plus capital gains realizations. As
shown in Table 5, as income increases, taxes as a percent of Social Security benefits rises.
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Table 5. Social Security Benefits and Taxes on Social Security Benefits
by Income Class Under 2005 Law and Income Levels
Social Security Benefits
Taxes on Social
Taxes as a Percentage
Level of Income
Security Benefits
(in millions)
(in millions)
of Benefits
Less than $10,000
$40,403
$0
0.0%
$10,000 - $15,000
$53,769
$1
0.0%
$15,000 - $20,000
$40,480
$4
0.0%
$20,000 - $25,000
$36,927
$9
0.0%
$25,000 - $30,000
$33,009
$17
0.1%
$30,000 - $40,000
$59,893
$390
0.7%
$40,000 - $50,000
$51,717
$1,412
2.7%
$50,000 - $100,000
$110,421
$11,508
10.4%
Over $100,000
$49,378
$10,767
21.8%
Total $475,997
$24,107
5.1%
Source: Congressional Budget Office simulations based on data from the Statistics of Income and supplemented
by data from the Current Population Survey.
Notes: Income is defined as AGI plus statutory adjustments, tax-exempt interest, and nontaxable Social Security
benefits. Number of Social Security beneficiaries includes beneficiaries under and over age 65.
Impact on the Trust Funds
The proceeds from taxing Social Security and Tier I benefits at 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, on the basis of the source of the benefits taxed.
Proceeds from taxing Social Security benefits and Tier I benefits at the 85% rate are credited to
the Hospital Insurance trust fund (HI) of Medicare. The Trustees Report reported income to
OASDI of $23.8 billion in 2011 from the taxation of benefits, or 3.0% of the combined income
for both funds.11 Income from the taxation of benefits in the HI fund in 2011 was $15.1 billion, or
2.8% of total HI fund income.12
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 OASDI
11 Social Security Administration, 2012 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds, Apr. 25, 2012, available at http://www.ssa.gov/OACT/TR/2012. Of
the $23.8 billion total for OASDI, $22.2 billion went to the OASI trust fund and $1.6 billion went to the DI trust fund.
12 Center for Medicare and Medicaid Services, 2012 Annual Report of the Board of Trustees of the Federal Hospital
Insurance Trust and Federal Supplementary Medical Insurance Trust Funds, Apr. 25, 2012, available at
http://www.cms.hhs.gov/ReportsTrustFunds/downloads/tr2012.pdf.
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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.13
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, Supplemental
Security Income, and black lung benefits). 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. Benefits from these other 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 his or
her share (one-half (50%)) 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.
The 1979 Advisory Council on Social Security concluded that 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.14 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, 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. 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. 95-216). 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 report15 that,
beginning in 1984, one-half (50%) of Social Security cash benefits and Tier I benefits payable
under the Railroad Retirement Act be taxable for individuals whose adjusted gross income,
excluding Social Security cash benefits, exceeded certain thresholds—$20,000 for a single
taxpayer, and $25,000 for a married couple, with the proceeds of such taxation credited to the
13 U.S. Congress, Senate Committee on Finance, Tax Free Status of Social Security Benefits, Report to Accompany
S.Res. 87, Comm. Rep. No. 97-135, June 15, 1981.
14 U.S. Congress, 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, Comm. Pub. No. 96-230, March 11 and 13, 1980, p. 13.
15 Social Security Administration, Report of the National Commission on Social Security Reform, January 1983, pp. 2-
10 through 2-11, available at http://www.ssa.gov/history/reports/gspan.html.
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Social Security trust funds. The commission did not include any provisions for indexing the
threshold amounts. The commission estimated that 10% of OASDI recipients would be subject to
taxation of benefits. The commission acknowledged that the proposal had a “notch” problem, in
that the extra dollar of income that would put one over the threshold would have had the effect of
subjecting fully one-half (50%) of Social Security benefits to taxation, 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 for determining
taxable benefits that gradually increased as a person’s income rose above the thresholds, up to a
maximum of one-half (50%) of benefits. The formula calculated taxable benefits as the lesser of
one-half (50%) of benefits or one-half (50%) of the excess of the taxpayer’s provisional income
over thresholds of $25,000 (single) and $32,000 (married couple). Provisional income was
defined as total income plus certain tax-exempt income (tax-exempt interest) plus certain income
exclusions plus one-half (50%) of Social Security benefits. At the same time, the tax credit for the
elderly and disabled was expanded to provide additional tax relief for lower income elderly
taxpayers.16
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,17 the ratio would be, on
average, about 7%. 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%.
Applying the tax rules for private and public pensions presents practical administrative problems.
Determining the proper exclusion would be complex for several reasons, including calculating the
ratio of contributions to benefits for each individual worker’s account when, unlike private
pensions, 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 (single) and $32,000 (married couple) were to pay taxes on their benefits.
Also as under then-current law, the first step was to add one-half (50%), not 85%, of benefits to
total 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 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
16 The credit was originally created to provide a benefit to retirees that had taxable retirement income rather than
nontaxable Social Security benefits.
17 The average for all workers entering the work force is for all workers born in 1970 entering the workforce. The
estimate for single males assumed the worker entering the work force in 1993 was 22 years old with steady income
until retirement at either age 62 or the normal retirement age.
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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 at
that time. 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 (single) and
$40,000 (married couple). 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 (single) and $44,000
(married couple). President Clinton signed the measure into law (as part of P.L. 103-66) on
August 10, 1993.
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Social Security: Calculation and History of Taxing Benefits
Appendix. Special Considerations Under Taxation
of Benefits
Lump Sum Distributions
A Social Security beneficiary may receive a lump sum distribution of benefits for one or more
prior years.18 In this situation, a beneficiary has the option of choosing between two methods for
calculating the taxable portion of the benefits for prior years: (1) the taxpayer may include all of
the benefits for prior years in calculating the taxable benefits for the current year; or (2) the
taxpayer may 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 computing the taxable portion of benefits in prior years, the provisional income for
the prior years is adjusted gross income plus tax exempt interest plus the excluded income (as
detailed earlier) plus the addition (or add-back) of the adjustment for student loan interest, plus
one-half (50%) of Social Security benefits.
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. Married taxpayers filing a joint tax return would use the total of the net Social
Security benefits for the tax year received by each party (taxpayer plus spouse). If, however, the
repayment results in negative net Social Security benefits, there are two consequences for taxes:
(1) there are no taxable Social Security benefits; and (2) the taxpayer may take a miscellaneous
deduction19 as part of itemized deductions, or a credit for the negative net Social Security
benefits. If the negative net Social Security benefits are less than $3,000, the taxpayer must
include negative net Social Security benefits in miscellaneous deductions for computing itemized
deductions. If the negative net Social Security benefits are greater than $3,000, the taxpayer must
compute the current year tax liability two ways: (1) using the negative balance as a miscellaneous
deduction for computing itemized deductions; and (2) re-computing the taxes (without the
overpayment income) for the prior years in which an overpayment was received and subtracting
these amounts from the prior year taxes paid, and then subtracting this result (the sum of the
differences in prior year taxes) from the current year tax liability. If the tax liability computed
using the negative balance as a miscellaneous deduction is lower, the taxpayer claims the
deduction. If the tax liability from re-computing prior year’s taxes is lower, the taxpayer claims a
tax credit equal to the sum of the prior year tax differences.
18 This is not the lump-sum death benefit which is not subject to the federal income tax. 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).
19 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.
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Social Security: Calculation and History of Taxing Benefits
Coordination of Workers Compensation
Under current law, an individual’s Social Security benefits (until the full retirement age), may be
reduced by a portion of the Workers Compensation payments (payments from some other public
disability program) received by the individual. Any reduction in Social Security benefits due to
the receipt of Workers Compensation is considered to be a Social Security benefit and is used in
determining the amount of Social Security benefits subject to taxation.
Treatment of Nonresident Aliens
Citizenship is not required for receipt of Social Security benefits. 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 subject to income tax
(i.e., none of the thresholds apply). 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.20
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 non-wage earners, 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.21 Voluntary tax withholding became effective with payments issued in February 1999.
The Economic Growth and Tax Relief Reconciliation Act of 2001 (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 an arbitrary rate of tax withholding (30%) on almost
all of the U.S. income of nonresident aliens, unless a lower rate is fixed by treaty. Thus, 30% of
20 Internal Revenue Service, Publication 915 provides a list of the countries whose citizens (as nonresident aliens) are
exempt from U.S. income taxes of Social Security benefits, and countries where residing U.S. citizens are exempt.
21 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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Social Security: Calculation and History of Taxing Benefits
85% (or 25.5%) of a nonresident alien’s Social Security benefits may be withheld for federal
income taxes.
Author Contact Information
Christine Scott
Specialist in Social Policy
cscott@crs.loc.gov, 7-7366
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