Social Security: Calculation and History of Taxing Benefits

Christine Scott
Specialist in Social Policy

Janemarie Mulvey
Specialist in Aging and Income Security

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 goes to the Medicare Hospital Insurance (HI) Trust Fund.
Income from taxation of benefits to the Social Security trust funds totaled $23.9 billion in 2010, or 3.1% of its total income. For Medicare, income from taxation of benefits totaled $13.8 billion in 2010, or 6.4% 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.


Date of Report: August 4, 2011
Number of Pages: 18
Order Number: RL32552
Price: $29.95

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