Tax Notes

Tax on Social Security Benefits Providing More Trust Fund Revenue

Since 1984, Social Security benefits have been partially subject to federal income tax. The share of benefits subject to tax depends on an expanded measure of income: adjusted gross income plus tax-exempt bond interest and one-half of Social Security benefits. Benefits are only subject to tax if this expanded income measure exceeds $25,000 (single) or $32,000 (married filing jointly). Above these thresholds, up to 50 percent of benefits are included in taxable income if the income measure is below $34,000 for singles or $44,000 for joint filers. For those with higher incomes, legislation enacted in 1993 increased the maximum inclusion rate to 85 percent of benefits; the 85 percent factor was intended to approximate the tax treatment of private pensions.

By design, more beneficiaries will be subject to tax over time. The Congressional Budget Office estimates that only about one-third of beneficiaries were taxed on at least part of their Social Security benefits in 2000. Since the expanded income thresholds are not indexed for inflation (and also since real incomes among beneficiaries tend to increase from one generation to the next), more and more beneficiaries will be affected in the future.

The taxes collected through these provisions are credited to the Social Security and Medicare Trust Funds. The taxes generated from including up to 50 percent of benefits in taxable income are credited to the Social Security Trust Funds, and any additional taxes generated from including up to 85 percent of benefits in taxable income are credited to the Medicare Hospital Insurance Trust Fund.