Social Security: Calculation and History of Taxing Benefits

Publication Date: October 2008

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

The Social Security system provides monthly benefits to qualified retirees, disabled workers, and their spouses and dependents. Until 1984 (P.L. 98-21), Social Security benefits were exempt from the federal income tax. In 1983, Congress made up to 50% of Social Security (and Tier I Railroad Retirement) benefits taxable for taxpayers whose income plus one-half (50%) of Social Security (and Tier I) benefits exceeds $25,000 for an individual or $32,000 for a married couple filing a joint tax return. The 1993 omnibus budget reconciliation bill (P.L. 103-66) introduced a two tier system for the calculation of taxable Social Security and Tier I benefits, with recipients whose incomes exceed $34,000 (single) or $44,000 (married couples), taxed on up to 85% of benefits. The proceeds from the taxation of Social Security benefits for the first tier (using the 50% ratio) go to the Old-Age and Survivors Insurance trust fund (OASI), and the Disability Insurance (DI) trust fund. The proceeds of the tax associated with the second tier (using the 85% ratio) go to the Health Insurance trust fund for Medicare.

Preliminary data for tax year 2002, show that 10.8 million income tax returns had taxable Social Security benefits, and that these returns included $94.7 billion in Social Security benefits in taxable income. In 2002, total Social Security benefits paid were $453.8 billion, resulting in 20.9% of benefits subject to the income tax. Because not all Social Security benefits are taxable, information from tax returns does not reflect all Social Security beneficiaries. In addition, for married couples filing a joint tax return there may be more than one beneficiary. The Congressional Budget Office (CBO) has estimated, using 2000 population and income levels with 2003 provisions of law, that 39% (or 15.6 million) Social Security beneficiaries are impacted by the income taxation of Social Security benefits.

In the 108th Congress, 16 bills were introduced, but did not pass either chamber, that would have liberalized or repealed the taxation of Social Security benefits. In the 109th Congress, three bills (H.R. 137, H.R. 179, and H.R. 1014) have been introduced which would impact the taxation of Social Security benefits. In addition, the Senate Budget Resolution (S.Con.Res. 95) would alter the taxation on benefits. This report will be updated as warranted by legislative activity.