|TAXABILITY OF SOCIAL SECURITY BENEFITS|
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OLR Research Report
April 10, 2008
TAXABILITY OF SOCIAL SECURITY BENEFITS
By: Kevin E. McCarthy, Principal Analyst
You asked (1) to what extent Social Security benefits are subject to state and federal income tax, (2) when and why these benefits were subjected to these taxes, and (3) have there been legislative proposals in recent years to limit or eliminate the taxability of Social Security benefits.
TAXABILITY OF SOCIAL SECURITY BENEFITS
Extent of Taxability
Connecticut's income tax is based on a taxpayer's adjusted gross income (AGI) as defined for federal income tax purposes, less any Connecticut income tax refund the taxpayer received in the tax year. The federal definition of AGI includes Social Security benefits under some circumstances. The federal tax treatment of Social Security benefits depends on the taxpayer's total income and marital status. Generally, if Social Security benefits were the taxpayer's only income, they are not taxable.
Taxpayers who have other income may have to treat a portion of their Social Security income as taxable to determine that portion, they must compare the base amount for their filing status to:
1. one-half of their benefits, plus
2. all of their other income, including tax-exempt interest.
The base amount is (1) $32,000 for married couples filing jointly; (2) $25,000 for single, head of household, qualifying widow or widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year; and (3) $0 for married persons filing separately who lived together during the year.
Generally, up to 50% of the benefits are taxable. But, up to 85% of the benefits can be taxable if (1) the total of one-half of the benefits and all the taxpayer's other income is more than $34,000 ($44,000 for married couples filing jointly) or (2) a married couple files separately but lives together at any time during the year. The actual amount of benefits that is taxable is calculated using a worksheet found in Internal Revenue Service publication 915, which is available on-line at www.irs.gov/pub/irs-pdf/p915.pdf.
Genesis of the Provision
The federal taxability of Social Security benefits resulted from P.L 98-21, which was adopted in 1983, and which was designed to improve the long-term sustainability of Social Security. The act made comprehensive changes in Social Security coverage, financing, and benefit structure. In large part, it followed the recommendations of the National Commission on Social Security Reform. The act counted up to one-half of Social Security benefits as taxable income for taxpayers whose AGI was at or above the base amounts described above. The act appropriated an amount equal to estimated tax liability to the Social Security trust funds. A summary of the act is available at www.ssa.gov/history/1983amend.html.
The Omnibus Budget Reconciliation Act of 1993 (P.L. 103-66) increased the maximum tax on Social Security benefits from 50% to 85%, among many other tax changes and expenditure reductions. This bill was designed to reduce the federal deficit.
RECENT LEGISLATIVE PROPOSALS
There have been many bills proposed in recent years to limit or eliminate the state taxability of Social Security benefits. This session, there have been at least eight such bills introduced (SBs 105 and 196 and HBs 5004, 5067, 5233, 5234, 5248, and 5404). All of these bills were referred to the Finance, Revenue and Bonding Committee, which did not take action on any of them.
Similar bills have been introduced frequently in the past, with at least 20 bills introduced between 2002 and 2007. Generally, these bills were referred to the Finance, Revenue and Bonding Committee, which took no action on them. However, the committee did hear, but took no further action on, HB 5541 in 2007. This bill would have phased out the income tax on Social Security and pension income. In 2006, the Select Committee on Aging heard SB 343, which would have increased the adjusted gross income thresholds used to determine a taxpayer's state personal income tax deduction on Social Security benefits. Again, the committee took no further action on the bill.