T he Social Security system provides monthly benefits to qualified retirees, disabled workers, and their spouses and dependents. In 1993, a second income threshold was added that increased the share of benefits that are taxable. However, up to 85% of Social Security benefits can be included in taxable income for recipients whose "provisional income" exceeds either of two statutory thresholds (based on filing status). The Congressional Budget Office (CBO) projected that 49% of Social Security beneficiaries (25.5 million people) were affected by the income taxation of Social Security benefits in tax year 2014. Impact on the Trust Funds

The proceeds from taxing Social Security and Railroad Retirement benefits at the 50% rate are credited to the Social Security's two trust funds—the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds—and to the Railroad Retirement system, on the basis of the source of the benefits taxed. Proceeds from taxing benefits at higher rates are credited to Medicare's Hospital Insurance (HI) trust fund. In 2016, the OASI and DI (collectively referred to as OASDI) trust funds were credited with $31.6 billion from taxation of benefits, or 3.4% of the funds' total income. Income from the taxation of benefits in the HI fund in 2016 was $20.2 billion, or 7.3% of total HI fund income. Because the income thresholds used to determine the share of benefits that is taxable are not indexed for inflation or wage growth, income taxes on benefits will become an increasingly important source of tax revenues for Social Security and Medicare. Additionally, the share will continue to grow, to over 7% by 2095. History of Taxing Social Security Benefits

Until 1984, Social Security benefits were exempt from the federal income tax. The National Commission on Social Security Reform (often referred to as the "Greenspan Commission"), appointed by President Reagan in 1981, recommended in its 1983 report that, beginning in 1984, 50% of Social Security cash benefits and Railroad Retirement Tier I benefits be taxable for individuals whose adjusted gross income, excluding Social Security benefits, exceeded $20,000 for a single taxpayer and $25,000 for a married couple, with the proceeds of such taxation credited to the Social Security trust funds. Provisional income equaled adjusted gross income plus tax-exempt interest plus certain income exclusions plus 50% of Social Security benefits.
Social Security provides monthly cash benefits to retired or disabled workers and their family members and to the family members of deceased workers. Those benefits were exempt from federal income tax, but in 1983, Congress approved recommendations from the National Commission on Social Security Reform (also known as the Greenspan Commission) to tax the benefits of some higher-income Social Security beneficiaries. Beginning in 1984, up to 50% of Social Security and Railroad Retirement Tier I benefits became taxable for individuals whose provisional income exceeds $25,000. The threshold is $32,000 for married couples. Provisional income equals adjusted gross income (total income from all sources recognized for tax purposes) plus certain otherwise tax-exempt income, including half of Social Security and Railroad Retirement Tier I benefits. The proceeds from taxing Social Security and Railroad Retirement Tier I benefits at up to 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, the Omnibus Budget Reconciliation Act (OBRA) increased the share of some Social Security and Railroad Retirement Tier I benefits that are taxable. That law 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 additional proceeds from that law are credited to the Medicare Hospital Insurance (HI) Trust Fund.
In 2016, the federal government received $51.8 billion in revenue from taxation of those benefits. Of that, $31.6 billion was credited to the Social Security trust funds, accounting for 3.4% of its total income. The remaining $20.2 billion was credited to the Medicare HI trust fund, which equaled 7.3% of its total income.
The Congressional Budget Office (CBO) projected that 49% of Social Security beneficiaries (25.5 million people) were affected by the income taxation of Social Security benefits in tax year 2014. That share will grow over time because the income thresholds used to determine the share of benefits that is taxable are not indexed for inflation or wage growth. As a result, income taxes on benefits will become an increasingly important source of income for Social Security and Medicare.