Patrick Purcell is with the Office of Retirement Policy, Office of Retirement and Disability Policy, Social Security Administration. Questions about the analysis should be directed to the generator at ( 202 ) 358-6348 .
The findings and conclusions presented in this paper are those of the authors and do not necessarily represent the views of the Social Security Administration .
Summary and Introduction
|AGI||adjusted gross income|
|AWI||average wage index|
|CBO||Congressional Budget Office|
|IRS||Internal Revenue Service|
|MINT||Modeling Income in the Near Term|
|OBRA 93||Omnibus Budget Reconciliation Act of 1993|
|SIPP||Survey of Income and Program Participation|
|SSA||Social Security Administration|
Since 1984, Social Security beneficiaries with total income exceeding certain thresholds have been required to claim depart of their Social Security benefits as taxable income. The income thresholds for tax of benefits have remained unchanged since Congress inaugural established them but, because wages have increased, the proportion of Social Security beneficiaries who must pay federal income tax on their benefits has risen over time. In 1984, less than 10 percentage of beneficiaries paid federal income tax on their benefits. A Social Security Administration ( SSA ) microsimulation model, Modeling Income in the dear Term ( MINT ), projects that 52 percentage of families receiving Social Security benefits will pay income tax on their benefits in 2015. Most of these families will be in the upper half of the total-income distribution.
This issue newspaper presents MINT projections of the share of Social Security beneficiary families that will owe union income tax on their benefits american samoa well as the proportion of benefit income they will owe as income tax in selected years from 2015 to 2050, with comparative data for 2010. Although 13 states besides tax Social Security income, the scope of this paper is restricted to federal income taxes .
In drumhead, MINT projects that an annual average of about 56 percentage of benefactive role families will owe income tax on their benefits over the period 2015–2050. For 2015, MINT projects that beneficiary families will owe a median of less than 1 percentage of benefits in income tax, but that one-fourth of those families will owe 11 percentage or more of their benefits in income tax. The model projects that the medial share of benefits owed as income tax by beneficiary families will rise to about 5 percentage over the protrusion period. Among the 52 percentage of families that are projected to owe federal income tax on their Social Security benefits in 2015, the medial share of benefits owed as tax will be 11 percentage. For those families, that proportion will remain close to 12 percentage over the period 2020–2050 .
Projecting taxation over a period of decades requires certain assumptions about future tax policy. For model, under current jurisprudence, income tax brackets are indexed to the rate of increase of consumer prices. In the retentive run, income tend to rise faster than prices as department of labor productiveness increases. If tax brackets continue to be indexed to prices, the share of benefit income paid as taxes finally will rise above its diachronic average. long-run tax estimates must assume either that income tax brackets will continue to be price-indexed or that Congress will act to adjust the brackets up. 1 The estimates in this paper incorporate the key assumption that Congress will act before 2025 to adjust the tax-bracket thresholds up. MINT assumes that the provisions of the tax code that presently stipulate the use of price index will change to require wage index after 2023. If tax brackets continue to be indexed to prices indefinitely, the proportion of Social Security benefit income that beneficiaries owe as income tax will be higher than the estimates shown in this paper for years after 2023 .
Another important caveat about the estimates in this paper is that they apply only to Social Security beneficiaries who are modeled in MINT. Adjusted by sample weights, the beneficiary population modeled by the current version of MINT represents 54.3 million persons in 2015, or 92 percentage of the average monthly benefactive role population of 59.0 million for January–June 2015 ( SSA 2015b ). As a leave, MINT simulations differ from administrative estimates produced by early federal agencies. As explained in Box 1, the dispute is attributable chiefly to certain income characteristics that typify the beneficiaries not simulated in MINT more powerfully than they represent beneficiaries overall. additionally, MINT simulations reflect scheduled benefits under current law. however, because Social Security ‘s Board of Trustees ( 2015 ) estimates that the trust funds will be depleted in 2034—after which, Social Security payroll tax tax income would be sufficient to pay only about 75 percentage of schedule benefits—Congress will presumably take remedial action before then. therefore, the long-run lengthiness of schedule benefits under stream law is unsealed, as is the clock of any solid changes .
How MINT simulations differ from other federal estimates of Social Security benefit tax
Each year, the Treasury Department ‘s Office of Tax Analysis ( OTA ) estimates the total of tax income generated by the taxation of Social Security benefits. The Treasury uses those estimates to citation income tax gross to the Social Security trust funds. For 2015, OTA estimates that federal income taxes on Social Security benefits will equal about 5.9 percentage of aggregate benefit income, in contrast with the 7.2 percentage figure estimated by MINT. The remainder between the two estimates stems in large part from the difference between the actual numeral of Social Security beneficiaries and the number of beneficiaries simulated in MINT. For case, for January–June 2015, the monthly number of Social Security beneficiaries averaged 59.0 million. MINT simulates a 2015 benefactive role population of 54.3 million, or 92 percentage of the actual number of beneficiaries. MINT excludes beneficiaries born before 1926, child beneficiaries, disable beneficiaries younger than age 31, and beneficiaries who reside in nursing homes .
According to data from the Census Bureau ‘s March 2014 Current Population Survey, the beneficiaries excluded from MINT are generally less likely to owe income tax on their benefits than are those included in the model simulations. In 2013, for exemplar, 52 percentage of child beneficiaries and 45 percentage of beneficiaries aged 80 or older lived in families with incomes lower than 200 percentage of the federal poverty threshold, compared with lone 30 percentage of beneficiaries aged 60–79 ( who comprise about two-thirds of the beneficiary population ). On modal, nurse home residents are older and poorer than early aged beneficiaries are ; consequently, they excessively are less likely to owe taxes on their Social Security benefits .
If MINT simulated all beneficiaries, its estimates of taxes owed as a percentage of profit income would be lower and, thereby, closer to the OTA estimates. As they are, MINT estimates closely resemble those of the Congressional Budget Office ( CBO ). CBO estimates that 51.5 million beneficiaries paid 6.7 percentage of their Social Security benefits as income tax in 2014 and projects that income taxes owed on Social Security benefits will rise to more than 9 percentage by 2039 ( Shakin and Seibert 2015 ). MINT estimates that 52.4 million beneficiaries paid 6.7 percentage of their benefits as income tax in 2014 and projects that income tax owed will exceed 10 percentage of benefit income by 2040. Like all estimates, these projections are unsealed and their accuracy depends on the dependability of their fundamental data, methods, and assumptions .
The first Social Security benefits were paid in 1940. From that clock time until 1984, benefits were excuse from federal income tax, as authorized by Treasury Department rulings issued in 1938 and 1941 ( SSA n.d. ). Because early forms of retirement income ( such as private- and public-sector pensions ) were subject to income tax, policymakers finally reconsidered the tax exemption for Social Security benefits. Both the 1979 Advisory Council on Social Security ( 1979 ) and the National Commission on Social Security Reform ( 1983 ) recommended that some Social Security benefits be included in taxable income .
The Social Security Act Amendments of 1983 ( public Law 98-21 ) established that beneficiaries whose sum annual income exceeds certain thresholds are required to pay income tax on up to 50 percentage of their Social Security profit income. Ten years late, the Omnibus Budget Reconciliation Act of 1993 ( OBRA 93, Public Law 103-66 ) established an extra higher threshold, above which up to 85 percentage of Social Security benefits are taxable. The 1983 amendments require beneficiaries to pay income tax on their benefits if their modified adjusted gross income ( AGI ) —which includes one-half of Social Security benefit income—is greater than $ 25,000 for single beneficiaries and $ 32,000 for marital couples ( table 1 ). 2, 3 specifically, beneficiaries who file taxes individually must count as taxable income the lesser of one-half of the amount by which modified AGI exceeds $ 25,000 or one-half of their benefit income. Married beneficiaries filing joint income tax returns are required to count as taxable income the lesser of one-half of the amount by which modified AGI exceeds $ 32,000 or one-half of their benefit income. 4 Prior to OBRA 93, all of the tax income raised from taxing Social Security benefits was credited to the Old-Age, Survivors, and Disability Insurance Trust Funds .
|Line||Modified AGI (nominal $)||Taxable portion of income|
|1||Less than 25,000||None|
|3||More than 34,000||Lesser of—
|Married, filing jointly|
|4||Less than 32,000||None|
|6||More than 44,000||Lesser of—
|SOURCE: IRS (2015b).|
|NOTE: Modified AGI is AGI plus nontaxable interest income plus income from foreign sources plus one-half of Social Security benefits.|
OBRA 93 established the second income thresholds of $ 34,000 of modified AGI for beneficiaries filing income tax singly and $ 44,000 of modified AGI for married beneficiaries filing jointly. Although profit income for tax filers with modify AGI below those thresholds remains taxable according to the terms of the 1983 amendments, up to 85 percentage of Social Security benefits are taxable for beneficiaries with modify AGI exceeding the raw thresholds. 5 The extra gross generated by increasing the maximal taxable proportion of benefits above the second threshold from 50 percentage to 85 percentage is credited to the Medicare Hospital Insurance Trust Fund .
The income tax treatment of Social Security benefits shown in table 1 sum up information available in a current Internal Revenue Service ( IRS ) taxpayer scout. The income thresholds and taxable proportions set away in the 1983 amendments and modified under OBRA 93 stay in effect today. Because the taxable-income thresholds are not indexed to changes in prices or wages in the national economy, the taxable symmetry of aggregate benefit income has risen over time .
A actor ‘s payroll tax contributions to Social Security in a given year are included in his or her taxable income for that year. In early words, workers pay income tax on the payroll tax. The 1983 amendments adopted the principle that beneficiaries should not pay income tax on the helping of benefit income that equals their previously taxed contributions. The principle of excluding from tax income an employee ‘s previously taxed contributions besides applies to pensions and annuities. 6
The 1983 amendments limited the taxable proportion of benefits to 50 percentage because employees pay half of the payroll tax, and their payroll tax contributions were already included in taxable income for earlier years. 7 however, although the actor pays half of the payroll tax, a typical worker ‘s life payroll tax contributions come to much less than half of his or her life Social Security benefits. In 1993, SSA ‘s Office of the Chief Actuary estimated that the payroll tax contributions of stream and future workers would equal less than 15 percentage of the stage prize of their life benefits ( Goss 1993 ). therefore, if the ratio of life contributions to benefits is less than 15 percentage, then up to 85 percentage of benefit income can be taxed without gamble of double tax. On that basis, OBRA 93 increased the maximal taxable part of Social Security benefits from 50 percentage to 85 percentage for beneficiaries whose modify AGI exceeds the second gear ( higher ) threshold specified in that law. OBRA 93 did not change the taxable helping of benefits between the beginning and second income thresholds, which continues to be 50 percentage. For beneficiaries with income below the first doorsill, all benefits continue to be tax-exempt security .
In its January 1983 report, the National Commission on Social Security Reform estimated that about 10 percentage of Social Security beneficiaries would pay income tax on their benefits if half of benefits were taxable for “ persons with Adjusted Gross Income ( before including therein any [Social Security] benefits ) of $ 20,000 if individual and $ 25,000 if married ” ( vehemence added ). The 1983 Amendments to the Social Security Act set the income thresholds for tax income of benefits at $ 25,000 for single persons and $ 32,000 for marry couples ( with income including one-half of Social Security benefits ). frankincense, the income thresholds Congress established for tax of benefits were higher than those recommended by the Commission, but the effect of the higher doorsill was partially offset by requiring taxpayers to include one-half of their Social Security benefits in the income computations .
When the 1983 amendments went into effect, about 8 percentage of beneficiary families were required to pay income tax on partially of their Social Security benefits ( House Ways and Means Committee 2004 ). That percentage has increased over time because the 1983 amendments set the thresholds for tax income of benefits in noun phrase dollars, quite than indexing them to price or wage changes in the national economy. 8 By 1993, an estimated 20 percentage of benefactive role families paid income tax on part of their benefits ( Pattison and Harrington 1993 ). subsequent estimates by the Congressional Budget Office ( CBO ) put the percentage of beneficiaries paying income tax on their benefits at 25 percentage in 1997, 32 percentage in 2000, and 39 percentage in 2003. More recently, CBO estimated that 49 percentage of Social Security beneficiaries paid income tax on their benefits in 2014 and that their modal tax requital equaled 6.7 percentage of benefit income, although “ less than 30 percentage of all Social Security benefits paid out in 2014 were capable to income tax ” ( Shakin and Seibert 2015 ). The authors besides projected that more than 9 percentage of benefits will be owed as income tax by 2039 .
Although the share of families that pays income tax on Social Security benefits has risen, not all beneficiary families are required to file an income tax return, and not all beneficiaries who file a retort owe income tax on their benefits. Individuals and married couples must file a tax render only if their taxable income exceeds the sum of the standard deduction and personal exemption amounts in impression for that class. 9 For model, in 2016, a single person younger than age 65 will have to file a federal income tax tax return only if his or her 2015 income from nontax-exempt sources exceeds $ 10,300. For married couples in which both spouses are younger than old age 65, the income brink for filing a tax return for 2015 will be $ 20,600. Single persons aged 65 or older will have to file a tax tax return in 2016 only of they have 2015 income of more than $ 11,850. Married couples in which both spouses are 65 or older will have to file a tax return only if their 2015 income exceeds $ 23,100 .
Data and Methods
The MINT microsimulation model was used to estimate the proportion of Social Security beneficiary families that will owe federal income tax on their benefits and the percentage of profit income they will owe as income tax over the period 2010–2050. Microsimulation models use information about a sample of “ micro units ” such as individuals, families, or households to estimate how changes in their characteristics or behavior will affect the entire population or a selected subgroup such as workers or retirees. These models are wide used by union agencies to analyze the distributional effects of public policy proposals. In addition to SSA, agencies such as the Department of Agriculture, the Department of Health and Human Services, CBO, the Congressional Research Service, and the Government Accountability Office have used microsimulation models in holocene years to estimate the effects of policy proposals on beneficiaries of federal programs. Smith and Favreault ( 2013 ) observe that microlevel data, when “ combined with detail representations of program rules, can inform policy by revealing interactions and trends that more aggregate analyses may fail to capture. ”
MINT links demographic data from the Census Bureau ‘s Survey of Income and Program Participation ( SIPP ) to Social Security earnings records to simulate the effects of alternate policy and economic scenarios on individual and family income. The MINT income tax calculator statistically matches the records for individual SIPP respondents with similar records in the IRS Statistics of Income data file. The projections in this newspaper use MINT interpretation 7 ( MINT7 ). MINT7 simulates federal income tax liability based on income tax parameters in effect through 2013, including the provisions of the American Taxpayer Relief Act of 2012 ( public Law 112-240 ) .
MINT7 simulations begin with a example sample distribution of the noninstitutionalized U.S. pornographic house physician population born after 1925, based on records from the 2004 and 2008 SIPP panels that have been matched to Social Security earnings records through 2010. 10 Adjusted by sample weights, the beneficiary population modeled by MINT7 represents 54.3 million persons in 2015. That number is equal to 92 percentage of the monthly average of 59.0 million persons who received benefits from January through June 2015. Beneficiaries omitted from the MINT7 sample include those born before 1926, children, disabled individuals aged 30 or younger, and harbor dwelling residents. 11
The Internal Revenue Code requires the income brackets to which each marginal tax rate applies to be indexed to annual price inflation, as measured by the Consumer Price Index. If tax brackets continue to be indexed to prices, taxes as a share of national income will rise substantially. consequently, long-run estimates of income taxes must assume either that the income tax will one day consume a larger share of national income than it does nowadays or that Congress will act to prevent such an addition by adjusting the brackets up .
MINT7 simulations assume that Congress will act to keep the proportion of national income paid as income tax from rising well above its long-run historic average. specifically, MINT models the current tax policy of price indexing through 2023 and assumes a throw to engage indexing using the national average wage index ( AWI ) thereafter. 12 This is a critical assumption because over time, wages—which are the largest single beginning of income—tend to rise faster than prices as british labour party productiveness increases. For exercise, the Social Security Board of Trustees states that over the period from 1967 through 2007, wages grew faster than prices by an average of 0.9 percentage points per class. The Board besides assumes that the average rate of increase of wages will exceed the average rate of price inflation by about 1.1 share points over the adjacent 75 years ( Board of Trustees 2014 ) .
MINT simulates tax-filing units, which in most cases are either unmarried individuals or married couples filing joint tax returns. 13 For simplicity, all tax-filing units that include at least one Social Security beneficiary are called “ beneficiary families, ” careless of whether the whole is a unmarried person or a marry copulate in which one or both spouses receive Social Security benefits .
MINT Simulation Results
This section discusses the stick out preponderance and relative amount of income tax liability on Social Security benefit income, based on the MINT7 simulations. The charts and tables illustrate broad trends by showing the projections in 5-year intervals ( quinquennially ) .
Beneficiary Families Filing a Tax Return and Owing Income Tax on Benefits
Chart 1 shows the project percentage of Social Security beneficiary families that will file a tax render and the percentage that will owe income tax on their benefits over the period 2010–2050. MINT projects that about 72 percentage of beneficiary families will file an income tax reelect through 2030, after which the proportion will fall lento to about 68 percentage by 2050. The worsen after 2030 reflects assumptions of both a change from price indexing to engage indexing for tax brackets after 2023 and a reduction in the rate of growth in retirement income from pensions and early non–Social Security sources .
Percentages of Social Security beneficiaries filing income tax returns and owing income tax on their benefits, 2010 and projected quinquennially
source : generator ‘s calculations using MINT7 .
As noted earlier, some beneficiaries who file income tax returns do not pay taxes on their benefits because their modified AGI does not exceed the taxable doorway. MINT projects that the proportion of beneficiary families that will owe income tax on their benefits will increase from about 47 percentage in 2010 to 52 percentage in 2015 and to 58 percentage in 2030, then will fall slightly to about 56 percentage by 2050. here excessively, the projected decay after 2030 reflects the premise of both the switch from price indexing to wage indexing for tax brackets and a slowing pace of increase in retirement income from nonbenefit sources .
Share of Benefits Paid as Income Tax
Chart 2 shows the project hateful share of Social Security benefits paid as income tax by three beneficiary-family groups : all such families ; families that file a tax return key ; and families that owe any income tax on their benefits. Among all benefactive role families, MINT projects that the intend percentage of profit income owed as income tax will increase from 6.4 percentage in 2010 to 7.2 percentage in 2015, to 9.7 percentage in 2030, and to 10.9 percentage by 2050. Because the income thresholds for tax income of benefits are fixed in nominal dollars, long-run increase in total income will result in a rising share of benefits being paid as income tax, even if tax code parameters presently indexed to price inflation are alternatively index to wage growth in the future .
Mean percentage of Social Security benefit income owed as income tax : Three beneficiary-family categories, 2010 and projected quinquennially
beginning : author ‘s calculations using MINT7 .
For beneficiary families that must file a tax return ( regardless of whether they owe income taxes on their benefits ), MINT projects the base percentage of benefits owed as income tax to increase from 8.2 percentage in 2010 to 9.2 percentage in 2015 and to 12.2 percentage in 2030. By 2040, beneficiary families that file tax returns will owe an average of 12.9 percentage of their benefits as income tax .
For beneficiary families that must pay income tax on their benefits, MINT projects that the beggarly percentage of benefit income owed as income tax will increase from 11.7 percentage in 2010 to 11.9 percentage in 2015 and to 12.2 percentage in 2030. By 2050, MINT projects that families that owe any tax on their benefits will owe 14.7 percentage of their benefits as income tax on median .
Median Percentage of Benefits Owed as Income Tax
Taxes due for the distinctive benefactive role family are possibly good represented by the median percentage of benefits owed as income tax. The medial lies at the center of the distribution, with equal numbers of families having higher and lower percentages due. Chart 3 shows the project median share of benefits owed as income tax among benefactive role families in the same three groups represented in Chart 2 .
median share of Social Security benefit income owed as income tax : Three beneficiary-family categories, 2010 and projected quinquennially
generator : writer ‘s calculations using MINT7 .
Among all beneficiary families, the median share of Social Security benefits owed as income tax was zero in 2010 and is projected to be merely 0.5 percentage in 2015. The median income tax liability on Social Security benefits among all beneficiary families will rise to 4.8 percentage in 2030 and will then remain relatively stable over the succeed 20 years .
Among families that file a tax return, the medial percentage of benefits paid as income tax was 6.6 percentage in 2010 and will be 7.7 percentage in 2015. MINT projects that percentage to rise to 9.9 percentage in 2030 and to 10.3 percentage by 2050 .
Among beneficiary families that owe any income tax on their benefits, the medial share of benefits owed as income tax was 10.4 percentage in 2010 and will rise to 11.1 percentage in 2015. MINT projects that contribution to reach 12.1 percentage in 2025 and then to remain stable over the follow 25 years. The percentage of benefits owed as income tax will stabilize because most families that owe income tax on their benefits will be in the 15 percentage bare income tax bracket, and most of them will be paying taxes on the maximum 85 percentage of benefits .
Benefit Income Owed as Income Tax Above and Below the Median
Some beneficiary families owe well more or less than the medial share of their benefits in taxes. As Chart 1 shows, 56–58 percentage of beneficiary families will owe some income tax on their benefits over the future respective decades. conversely, 42–44 percentage of beneficiary families will owe no income tax on their Social Security benefits in any given class, again assuming that tax brackets will be indexed to wages preferably than prices after 2023 .
Under current law, the highest percentage of Social Security benefits that any family pays as income tax is 33.7 percentage. That calculate represents the product of the maximal proportion of benefit income that is taxable ( 85 percentage ) and the highest borderline income tax rate ( 39.6 percentage ). In 2015, the 39.6 percentage marginal tax pace applies to taxable income above $ 411,200 for single persons and to taxable income above $ 464,850 for married couples filing joint returns. MINT projects that less than 1 percentage of beneficiaries will owe 33.7 percentage of their benefits as income tax in 2015 or in any year through 2050 ( not shown ). In 2015, an estimated 80 percentage of beneficiaries filing individually and 79 percentage of marital couples filing jointly are in either the 15 percentage or 25 percentage bare tax brackets ( board 2 ) .
|Marginal tax rate (%)||Filing status|
|Single||Married, filing jointly|
|SOURCE: Author’s calculations using MINT7.|
|NOTE: Data are for the 52 percent of beneficiary families estimated to owe tax on their benefits.|
|a. Less than 0.5 percent.|
In addition to the median percentage of benefit income owed as income tax by benefactive role families, Chart 4 shows the 90th-, 75th-, and 25th-percentile values. The graph covers all beneficiary families, including those that owe no income tax on their Social Security benefits. beneficiary families at the 90th percentile of income tax liability on Social Security benefits paid 15.0 percentage of their benefits as income tax in 2010 ; those families will owe 16.1 percentage of their benefits as income tax in 2015 and about 17 percentage in by and by years. benefactive role families at the 75th percentile of income tax liability paid 9.7 percentage of their benefits as income tax in 2010. MINT projects that those families will owe 11.4 percentage of their benefits as income tax in 2015 and about 13 percentage over the period 2025–2050. The median percentage of benefit income due as income tax among all benefactive role families is represented by the blue lineage, which duplicates the blue line in Chart 3, described earlier. Families at the 25th and lower percentiles of tax indebtedness paid no income tax on their Social Security benefits in 2010, and MINT projects that they will not be required to pay income tax on their Social Security benefits at any time in the period 2015–2050 .
percentage of Social Security benefit income that is owed as income tax among benefactive role families : Selected percentiles, 2010 and projected quinquennially
source : writer ‘s calculations using MINT7 .
Benefit Income Owed as Income Tax by Total-Income Quartile
Because of the progressiveness of income tax rates, higher-income families owe higher percentages of their Social Security benefits as income tax than do lower-income families. For example, a benefactive role family with income in the highest quartile pays a larger share of its benefits as income tax than does a syndicate in the lowest quartile. For each consecutive quartile, from lowest to highest, the visualize percentages should increase .
To provide a coherent basis for comparing income over time, MINT projects the amounts that will define the income-quartile boundaries among benefactive role families from 2010 to 2050, and expresses them relative to the national AWI ( Table 3 ). For case, among beneficiary families in 2010, a family with sum income adequate to at least 2.273 times the national AWI was in the fourth ( highest ) income quartile. A beneficiary family was in the third income quartile in 2010 if it had income between 1.223 and 2.273 times the AWI. A beneficiary family with income between 0.624 and 1.223 times the AWI was in the second income quartile, and a beneficiary family with income of less than 0.624 times the AWI was in the first base ( lowest ) income quartile .
|Year||National AWI (nominal $)||Total family income relative to national AWI|
|75th percentile||Median||25th percentile|
|SOURCE: Author’s calculations using MINT7.|
Chart 5 shows MINT projections of the beggarly share of benefits paid as income tax by beneficiary families in each total-income quartile. sum income consists of pretax cash income from all sources, including the estimate measure a class would receive if it used its fiscal assets to purchase an annuity. benefactive role families in the one-fourth income quartile paid 13.9 percentage of their benefits as income tax, on average, in 2010. MINT projects that families in the fourth income quartile will owe 14.0 percentage of their benefits as income tax in 2015 and 14.8 percentage in 2020. From 2030 through 2050, MINT projects that families in the one-fourth income quartile will owe about 16 percentage of their benefits as income tax .
Mean share of Social Security benefit income owed as income tax among beneficiary families, by total-income quartile : 2010 and projected quinquennially
source : generator ‘s calculations using MINT7 .
On average, beneficiary families in the third income quartile paid 5.0 percentage of their benefits as income tax in 2010. MINT projects that those benefactive role families will owe 6.9 percentage of benefits as income tax in 2015 and 8.6 percentage in 2020. Over the period 2025–2050, MINT projects that beneficiary families in the third income quartile will owe an median of about 10 percentage of their Social Security benefits in income taxes .
beneficiary families in the lower half of the income distribution pay a well lower proportion of their benefits as income tax than do those with income above the medial. Families in the second income quartile paid less than 0.5 percentage of their benefits as income tax in 2010 and they will owe 1.1 percentage of their benefits as income tax in 2015. That proportion will rise to 3.3 percentage in 2030 and by 2050, MINT projects that families in the second gear income quartile will owe 4.3 percentage of their Social Security benefits in income tax. Families in the lowest quartile paid no income tax on their benefits in 2010. MINT projects that those families will owe fair 1.1 percentage of benefits as income tax by 2050 .
In contrast with Chart 5 ‘s hateful percentages, Chart 6 shows the median percentages of benefits paid as income tax by beneficiary families within each income quartile. A kin in the fourth income quartile paid a median of 12.4 percentage of its benefits as income tax in 2010 and is projected to owe 13.2 percentage in 2015 and about 14 percentage thereafter. A family in the one-third income quartile paid a medial of 3.7 percentage of its benefits as income tax in 2010 and is projected to owe 7.1 percentage in 2015 and between 9 percentage and 11 percentage from 2025 through 2050. MINT projects that the medial tax indebtedness for families in the second and first income quartiles will be zero throughout the period 2010–2050 .
median share of Social Security benefit income owed as income tax among beneficiary families, by total-income quartile : 2010 and projected quinquennially
source : generator ‘s calculations using MINT7 .
a. Because the project median percentages for beneficiary families in the second income quartile are zero in every year, the jutting median percentages for beneficiary families in the first gear income quartile are inevitably besides zero in all years .
Social Security benefits were first subject to income tax in 1984 and since then, the proportion of beneficiary families whose benefits are taxed has increased from less than one in ten-spot to more than one-half. SSA ‘s MINT microsimulation exemplary, containing data on about 92 percentage of Social Security beneficiaries, projects that 52 percentage of benefactive role families will pay income tax on their Social Security benefits in 2015. The median tax payment among all benefactive role families will equal less than 1 percentage of benefit income in 2015 ; but among only those families whose benefits are taxable, the medial income tax requital will equal 11.1 percentage of Social Security benefits. By 2030, MINT projects that 58 percentage of beneficiary families will owe income tax on their Social Security benefits and that the median income tax payment will equal about 5 percentage of their profit income. Among families that owe income tax on their benefits, the exemplar projects a median payment peer to 12 percentage of benefit income in 2030. These estimates are based on the assumption that Congress will amend provisions of the Internal Revenue Code that presently require tax-bracket adjustments based on price index ; such amendments would assure that the symmetry of income paid as income tax would remain close to its stream grade. otherwise, the percentage of Social Security benefits that will be owed as income tax will exceed the charge that MINT has projected .
Because the progressiveness of the federal income tax assures that higher-income beneficiaries pay the most taxes, the taxation of benefits reduces the final Social Security income received by higher-income beneficiaries. In that regard, taxing Social Security benefits has the lapp impression that a mean test would have, without the administrative cost that direct means testing would entail ( Goodman and Liebman 2008 ). 14 Means tests are effective for targeting benefits to persons who are most in need, but they can be expensive to administer. In 2014, for exercise, federal expenditures for the Supplemental Nutrition Assistance Program ( SNAP ) were $ 76 billion. Of that total, 4.9 percentage ( $ 3.7 billion ) went to administrative expenses, including means testing. Based on entire Social Security expenditures of $ 851 billion in fiscal year 2014, each share point in hypothetical expenditures needed to institute means testing would raise annual Social Security platform spending by more than $ 8.5 billion .
Because Congress established income thresholds below which Social Security benefits are tax-exempt security, benefit income continues to be taxed less heavy than income from annuities and pensions. Individuals with modified AGI of less than $ 25,000 and married couples with modify AGI of less than $ 32,000 pay no income tax on their Social Security benefit income. Because those income thresholds are not index to prices or wages, the proportion of beneficiaries who pay taxes on their benefits has increased over time. finally, the taxation of Social Security benefits will be roughly equivalent to the current-law tax income of pensions and annuities—which, according to the legislative history of the 1983 amendments, was Congress ‘ captive when it set the threshold for tax of benefits in nominal dollars .
1 From 1950 through 2012, the proportion of income taxes to personal income averaged 9.5 percentage per class. The annual proportion was never lower than 7.2 percentage or greater than 11.6 percentage ( IRS 2014 ) .
2 For most taxpayers, modified AGI equals AGI plus tax-exempt interest income, income from foreign sources, and one-half of Social Security benefits .
3 special rules apply to heads of households ( single parents ) and married couples filing individually. complete rules for counting Social Security and Tier 1 Railroad Retirement benefits as taxable income are included in IRS ( 2015a ) .
4 Pattison and Harrington ( 1993 ) describe the origins of both the income thresholds at which Social Security benefits become taxable and the percentage of benefits subject to income tax .
5 Pattison ( 1994 ) describes the 1993 provisions that increased the tax of Social Security benefits .
6 According to IRS instructions, “ if you paid part of the price of your pension or annuity, you are not taxed on the function of the pension or annuity you receive that represents a return of your cost. The lie of the come you receive is broadly taxable ” ( IRS 2015b, 77 ) .
7 As of 2015, a proletarian pays a Social Security payroll tax of 6.2 percentage on earnings astir to $ 118,500. The worker ‘s employer pays an equal sum, which is a tax-deductible business expense. freelance workers are apt for the full 12.4 percentage payroll tax, but they are eligible for two tax deductions : They may reduce their net earnings from self-employment by half the amount of the Social Security payroll tax, and they can deduct half of their Social Security tax from personal income reported on IRS Form 1040. The payroll tax deduction is a factor in determining AGI ( SSA 2015a ) .
8 The choice of nominal-dollar thresholds was careful, so that finally the tax treatment of Social Security income would be alike to that of pensions and annuities ( Senate Finance Committee 1993 ) .
9 taxable income consists chiefly of wages and salaries, interest, dividends, rent, royalties, capital gains, income from the sale of goods or property, income from a farm or occupation, annuities, pensions, alimony, unemployment recompense, and distributions from retirement accounts other than certified Roth distributions .
10 For the 2004 SIPP panel, 88 percentage of survey records were matched to their Social Security earnings records. The pit pace for the 2008 panel was more than 90 percentage. Characteristics of parentage cohorts after 1979 are simulated rather than being based on SIPP records .
11 MINT simulations for 2020 and late reflect samples that are successively more representative of the broad population of senesce beneficiaries, as members of birth cohorts from 1925 or earlier are replaced by members of late cohorts over time .
12 Results would be exchangeable if the assume date of the switch to engage indexing were a few years earlier or later. For a description of the national AWI, see hypertext transfer protocol : //www.socialsecurity.gov/oact/cola/AWI.html .
13 For 2015, MINT simulates the distribution of beneficiary units to be 21 percentage filing individually, 50 percentage married couples filing jointly, 1 percentage filing as the head of a family, and 28 percentage not filing a tax render .
14 Means tests limit eligibility for government-provided benefits or reduce the measure of the profit for individuals who have income or assets above thresholds set in law. irregular aid for Needy Families ( TANF ), the Supplemental Nutrition Assistance Program ( SNAP ), Supplemental Security Income ( SSI ), and Medical Assistance ( Medicaid ) are means-tested programs. Social Security and Medicare, as social indemnity programs funded largely by payroll taxes levied on workers and their employers, are not mean tested, although Medicare Part B ( auxiliary checkup policy ) and Part D ( prescription drug drug coverage ) both charge income-related premiums to participants .
1979 Advisory Council on Social Security. 1979. Social Security Financing and Benefits: Report of the 1979 Advisory Council. Washington, DC : Department of Health, Education, and Welfare, SSA .
[ Board of Trustees ] Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. 2014. The 2014 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, DC : Government Printing Office. hypertext transfer protocol : //www.socialsecurity.gov/oact/tr/2014/tr2014.pdf .
———. 2015. The 2015 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds. Washington, DC : Government Printing Office. hypertext transfer protocol : //www.socialsecurity.gov/oact/tr/2015/tr2015.pdf .
Goodman, Sarena, and Jeffrey Liebman. 2008. “ The Taxation of Social Security Benefits as an Approach to Means Testing. ” NBER Retirement Research Center Paper No. NB 08-02. Cambridge, MA : National Bureau of Economic Research. hypertext transfer protocol : //www.nber.org/aging/rrc/papers/orrc08-02.pdf .
Goss, Stephen C. 1993. “ Current Approach and Basis for Considering a change to 85-Percent Taxation of Monthly OASDI Benefits. ” Letter to Harry C. Ballantyne, Chief Actuary, Social Security Administration .
House Ways and Means Committee. See U.S. Congress, House Committee on Ways and Means .
[ IRS ] Internal Revenue Service. 2014. “ SOI Tax Stats—Historical Table 8. ” hypertext transfer protocol : //www.peterswar.net/uac/SOI-Tax-Stats-Historical-Table-8 .
———. 2015a. Social Security and Equivalent Railroad Retirement Benefits. IRS Publication 915. hypertext transfer protocol : //www.irs.gov/pub/irs-pdf/p915.pdf .
———. 2015b. Your Federal Income Tax. IRS Publication 17. hypertext transfer protocol : //www.peterswar.net/pub/irs-pdf/p17.pdf .
National Commission on Social Security Reform. 1983. Report of the National Commission on Social Security Reform. hypertext transfer protocol : //www.socialsecurity.gov/history/reports/gspan.html .
Pattison, David. 1994. “ Taxation of Social Security Benefits Under the New Income Tax Provisions : Distributional Estimates for 1994. ” Social Security Bulletin 57 ( 2 ) : 44–50. hypertext transfer protocol : //www.socialsecurity.gov/policy/docs/ssb/v57n2/v57n2p44.pdf .
Pattison, David, and David E. Harrington. 1993. “ Proposals to Modify the Taxation of Social Security Benefits : Options and Distributional Effects. ” Social Security Bulletin 56 ( 2 ) : 3–21. hypertext transfer protocol : //www.socialsecurity.gov/policy/docs/ssb/v56n2/v56n2p3.pdf .
Senate Finance Committee. See U.S. Congress, Senate Committee on Finance .
Shakin, Joshua, and Kurt Seibert. 2015. “ The Taxation of Social Security Benefits. ” Washington, DC : congressional Budget Office. hypertext transfer protocol : //www.peterswar.net/publication/49948 .
Smith, Karen E., and Melissa M. Favreault. 2013. “ A Primer on Modeling Income in the near Term, Version 7 ( MINT7 ). ” Washington, DC : Urban Institute. hypertext transfer protocol : //www.urban.org/sites/default/files/alfresco/publication-pdfs/413131 % 20- % 20A-Primer-on-Modeling-Income-in-the-Near-Term-Version-MINT-.pdf .
[ SSA ] Social Security Administration. 2015a. “ If You Are Self-Employed. ” SSA Publication No. 05-10022. hypertext transfer protocol : //www.socialsecurity.gov/pubs/EN-05-10022.pdf .
———. 2015b. “ monthly Statistical Snapshot. ” hypertext transfer protocol : //www.socialsecurity.gov/policy/docs/quickfacts/stat_snapshot/.
———. n.d. “ Social Security History : Treasury Rulings on Taxation of Benefits. ” hypertext transfer protocol : //www.socialsecurity.gov/history/it3447.html .
U.S. Congress, House Committee on Ways and Means. 2004. Background Material and Data on the Programs within the Jurisdiction of the Committee on Ways and Means. Committee Print No. 108-6. Washington, DC : Government Printing Office .
U.S. Congress, Senate Committee on Finance. 1993. Taxation of Social Security Benefits. Senate Hearing No. 103-316. Washington, DC : Government Printing Office .