CRS FACT SHEET EXPLAINS CHANGES TO SOCIAL SECURITY BENEFITS TAXATION.
93-336 EPW
- AuthorsKollman, Geoffrey
- Institutional AuthorsCongressional Research Service
- Code Sections
- Index TermsFICA benefitslegislation, tax
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-12353
- Tax Analysts Electronic Citation93 TNT 244-19
DETERMINATION OF TAXABLE SOCIAL SECURITY BENEFITS UNDER NEW LAW: A FACT SHEET
Geoffrey Kollmann Education and Public Welfare Division
SUMMARY. Up to one-half of social security benefits of upper income individuals are subject to the income tax in 1993. Recently enacted legislation increases this proportion for some recipients to 85 percent beginning in 1994.
BACKGROUND. 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 Internal Revenue Service. For years, analysts questioned these rulings and advocated that social security be treated the same as other pension income. Pension benefits are taxable except for the portion of benefits attributable to the worker's contributions. However, it was only after the social security system was threatened with insolvency that taxing benefits received serious political attention. Following the recommendation of an advisory commission established to develop ways to solve the crisis, in 1983 Congress enacted a provision making up to one-half of benefits taxable for upper income recipients. Under the 1983 law, a portion of social security benefits is included in taxable income of taxpayers whose "provisional income" -- the combination of adjusted gross income, tax-exempt interest income, and 50 percent of their social security benefits -- exceeds $25,000 for individuals and $32,000 for couples filing joint returns (zero for couples filing separately). By design, these thresholds are not indexed to rise with inflation or wage growth. The amount of taxable benefits is the lesser of one-half of benefits or one-half of the excess of the combined income over the threshold. EXAMPLE 1 illustrates how the provision works in 1993. The taxable portion of a $10,000 annual benefit for a single taxpayer who has $32,000 in adjusted gross income would be computed thus: 1/2 x $10,000 = $5,000 (one-half of the social security benefit), + $32,000 (adjusted gross income) = $37,000, minus $25,000 (the threshold for single taxpayers) = $12,000 (the excess over the threshold), x 1/2 = $6,000. However, because one-half of the benefits is the most that can be taxed, $5,000 would be the amount of social security that would be added to the taxpayer's other taxable income.
EXAMPLE 1: OLD (1993) LAW
Adjusted gross income $32,000
1/2 of benefits +5,000
Total 37,000
Less: exempt amount -25,000
Excess 12,000
Taxable benefits 5,000
(1/2 of excess, or 1/2 of
benefits, if lower)
NEW LAW. In his FY 1994 budget, President Clinton proposed that the percentage of benefits potentially subject to tax be increased from 50 percent to 85 percent, effective in 1994. The House approved the President's proposal as part of the 1993 Omnibus Budget Reconciliation bill, but the Senate version created a second, higher, threshold level to which the 85-percent factor would apply ($32,000 for individuals and $40,000 for couples). Under this approach, old law would continue to apply to provisional income below the new thresholds, but above them each additional dollar of provisional income would subject 85 cents of benefits to taxation, up to the point where fully 85 percent of benefits were taxable (i.e., no more than 85 percent of total benefits could be taxed). Conferees on the bills accepted the Senate's approach but raised the second-tier thresholds to $34,000 and $44,000, and this became final law (P.L. 103-66). Because the new law incorporates both old and new rules, the computation of the total taxable benefits can be complicated. Following is a worksheet that can be used to determine the total amount of benefits subject to tax under the new law.
WORKSHEET FOR TAXING BENEFITS UNDER NEW LAW
1. Yearly social security benefits
2. One-half of line 1 (provisional income)
3. Adjusted Gross Income plus tax-free interest
4. Add lines 2 and 3
5. Enter: $25,000 if single or head of household;
$32,000 if married filing jointly;
$0 if married filing separately
6. Subtract line 5 from line 4
(If line 6 is zero or negative, stop. No benefits are taxable)
7. One-half of line 6
8. Enter smaller of amounts on lines 2 or 7
9. Enter amount on line 4
10. Enter: $34,000 if single or head of household;
$44,000 if married filing jointly;
$0 if married filing separately
11. Subtract line 10 from line 9
(If line 11 is zero or negative, stop. Taxable benefits are limited
to line 8)
12. Multiply line 11 by 0.85
13. Enter smallest of: amount on line 8;
$4,500 if single or head of household;
$6,000 if married filing jointly;
$0 if married filing separately
14. Add amounts on lines 12 and 13
15. Multiply line 1 by 0.85
16. Enter smaller of amounts on lines 14 or 15
(This amount is added to taxable income on form 1040)
In truncated form, EXAMPLE 2 is an illustration of how the new law will work. For comparative purposes, it uses the same circumstances as illustrated in Example 1. Note that the determination of provisional income is the same as under old law, i.e., it adds one-half (not 85 percent) of benefits to other income, as shown in lines 2 and 4 of the worksheet. Also, note that taxable benefits computed under the old law are limited to half the difference between the first and second tier thresholds. These limits are $4,500 for singles and $6,000 for couples (e.g., $34,000 - $25,000 = $9,000 x 1/2 = $4,500), as shown in line 13. Finally, no more than 85 percent of benefits can be taxed, as shown in line 16 of the worksheet.
EXAMPLE 2: NEW (1994) LAW
Adjusted gross income $32,000
1/2 of benefits +5,000
Total 37,000
Less current law
exempt amount -25,000
Excess 12,000
Taxable benefits under old law 4,500
(lower of 50% of excess,
50% of benefits, or $4,500)
85% of excess above
new threshold 2,550
($37,000 - $34,000 x 85%)
Total benefits taxable 7,050
(taxable portions above old and new
thresholds, or 85% of benefits, if lower)
For more detailed information, see: U.S. Library of Congress. Congressional Research Service. Social Security: President Clinton's Proposal to Increase Taxation of Benefits. Issue Brief No. IB93044.
- AuthorsKollman, Geoffrey
- Institutional AuthorsCongressional Research Service
- Code Sections
- Index TermsFICA benefitslegislation, tax
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-12353
- Tax Analysts Electronic Citation93 TNT 244-19
