________________________________________________________________________ 

________________________________________________________________________ 

Report on the Taxation of 

Social Security and Railroad Retirement Benefits 

in Calendar Years 1997 through 2004 

Report to the Congress, 

the Secretary of Health and Human Services, 

the Social Security Administration, 

and the Railroad Retirement Board 

Department of the Treasury 

January 2009 

 


 


 

 

	 
DEPARTMENT OF THE TREASURY 

WASHINGTON, D.C. 20220 

ASSISTANT SECRETARY 

The Honorable Nancy Pelosi 

Speaker of the House of Representatives 

Washington, DC 20515 

Dear Madam Speaker: 

Section 121 of the Social Security Amendments of 1983 (P.L. 98-21), directs the 

Secretary of the 'Ireasury to transfer from the general fund of the Treasury to the Social 

Security and Railroad Retirement trust funds amounts equivalent to the tax liabilities 

attributable to the taxation of Social Security and Railroad Retirement benefits. Section 

121 further provides that the Secretary of the Treasury shall submit annual reports 

concerning (1) the transfers made that year, and the methodology used in determining the 

amount of such transfers and the funds of accounts to which made, and (2) the anticipated 

operation of the transfers during the next five years. 

Pursuant to Section 121, I am pleased to submit the "Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Years 1997 through 2004." 

This report is also being transmitted to the President of the Senate, the Secretary of the 

Department of Health and Human Services, the Commissioner of the Social Security 

Administration, and the Chairman of the Railroad Retirement Board. 

Sincerely, 

/~Jg-~

Kevin 1. Fromer 

Assistant Secretary for Legislative Affairs 

cc:	 The Honorable Clifford C. Eby
 

Administrator (Acting), Federal Railroad Administration
 
TABLE OF CONTENTS 

INTRODUCTION AND SUMMARY ................................................................................1 

CHAPTER 1: METHODOLOGY AND ESTIMATES OF THE TAX LIABILITY 

ATTRIBUTABLE TO THE TAXATION OF BENEFITS FOR CALENDAR 

YEARS 1997 THROUGH 2004..................................................................5 

I. Methodology for Estimating Tax Liability..................................................5 

II. Estimates of Tax Liability Attributable to the 

Taxation of Benefits in Calendar Years 1997 through 2004 .......................6 

CHAPTER 2: METHODOLODGY FOR ESTIMATING TRANSFERS AND 

CALCULATING ADJUSTMENTS TO TRANSFERS FOR LIABILITY IN 

CALENDAR YEARS 1997 THROUGH 2004 .........................................16 

I. Methodology for Estimating Quarterly Transfer Amounts ......................16 

II. Methodology for Adjustments to Transfers of Estimated Amounts..........17 

III. Transfers of Estimated Amounts and Adjustments to Transfers 

for Liability in Calendar Years 1997 through 2004...................................17 

CHAPTER 3: FORECAST OF TRANSFERS TO TRUST FUNDS FOR CALENDAR 

YEARS 2005 THROUGH 2009................................................................20 

I. Forecasting Methodology ..........................................................................20 

II. Forecasts of Transfers to the Trust Funds..................................................20 

CHAPTER 4: DISTRIBUTION OF TAXABLE BENEFITS AND ANALYSIS OF 

PROVISIONAL INCOME SOURCES .....................................................23 

I. Distribution of Taxable Benefits by Provisional Income Class 

for Calendar Years 1997 through 2004......................................................23 

II. Comparison of Provisional Income Sources for Calendar 

Years 1995 through 2004...........................................................................24 
INTRODUCTION AND SUMMARY 

I. Introduction 

Since January of 1984, the Treasury Department has been required to estimate the 

individual income tax liabilities attributable to the inclusion of Social Security (Federal Old 

Age and Survivors and Federal Disability Insurance) and Railroad Social Security 

Equivalent benefits in adjusted gross income (AGI) for each liability year. These estimated 

liabilities are transferred from the general fund to the Federal Old Age and Survivors 

Insurance (FOASI), Federal Disability Insurance (FDI), and Railroad Social Security 

Equivalent Benefit Account (SSEBA) trust funds on a quarterly basis. Since 1994, transfers 

have also been made to the Federal Hospital Insurance (Medicare) trust fund (FHI). The 

amounts transferred to these trust funds are calculated as the difference between forecasts of 

tax liabilities made with and without the inclusion of forecasted levels of benefits in AGI. 

Both the taxation of benefits and the transfers to the trust funds are required by the Social 

Security Amendments of 1983 (P.L. 98-21), as amended by the Railroad Retirement 

Solvency Act of 1983 (P.L. 98-76), the Consolidated Budget Reconciliation Act of 1985 

(P.L. 99-272), and the Omnibus Budget and Reconciliation Act of 1993 (OBRA 93) (P.L. 

103-66). P.L. 98-21 also requires that correcting adjustments be made to the amounts 

transferred to the trust funds if the estimates of the tax liability attributable to the benefits are 

subsequently shown to be incorrect. 

In addition, P.L. 98-21 requires the Treasury Department to submit annual reports to 

the Congress, the Secretary of Health and Human Services, and the Railroad Retirement 

Board containing both a description of the methodology used to estimate the transfers to the 

trust funds and a forecast of transfers over the five subsequent years. The Treasury 

Department's Office of Tax Analysis (OTA) is responsible for preparing these annual 

reports, as well as for estimating transfers to the trust funds and calculating correcting 

adjustments to the transfers based on actual tax return data. This report covers an eight year 

period, and describes (1) the transfers to the trust funds for calendar years 1997 through 

2004, (2) the necessary correcting adjustments to the transfers for calendar years 1997 

through 2004, and (3) the forecast of liability and transfers for calendar years 2005 through 

2009.1 

To determine if any benefits were taxable in calendar years 1997 through 2004, 

taxpayers had to add both tax-exempt interest income and one-half of Social Security and 

Railroad Social Security Equivalent benefits to AGI. This augmented AGI is referred to as 

provisional income. If provisional income exceeded thresholds of $25,000 for single filers 

and $32,000 for joint filers, taxpayers were required to include in AGI the lesser of one-half 

of the benefits or one-half of the excess of provisional income over the thresholds. If 

provisional income exceeded $34,000 for single filers and $44,000 for joint filers, taxpayers 

were required to include in AGI the lesser of: 

1 
(1) 85 percent of the recipient's Social Security or Railroad Social Security 

Equivalent benefit 

or 

(2) the sum of 

(a) the smaller of (i) the amount included under the lower thresholds or 

(ii) $4,500 (for single filers) or $6,000 (for joint filers) 

plus 

(b) 85 percent of the excess of the recipient's provisional income over the 

applicable second provisional income threshold.2 

Certain married beneficiaries not filing joint returns had a provisional income 

threshold of zero. The adjusted gross income of these individuals included the lesser of 85 

percent of the beneficiary's Social Security or Railroad Social Security Equivalent benefit or 

85 percent of the recipient's provisional income. Therefore, for the highest income 

beneficiaries, a maximum of 85 percent of Social Security or Railroad Social Security 

Equivalent benefits was includable in AGI. None of the provisional income thresholds are 

indexed for inflation. 

For beneficiaries whose provisional incomes are above the first threshold but below 

the second threshold, the tax liabilities attributable to the included benefits are transferred to 

the FOASI and FDI (Social Security) trust funds and the Railroad Social Security Equivalent 

benefit trust fund. For beneficiaries whose provisional incomes are above the second 

threshold, the tax liabilities attributable to the additional included benefits are transferred to 

the FHI (Medicare) trust fund. 

To summarize, the Office of Tax Analysis estimates the income tax liability 

attributable to the partial inclusion of FOASI, FDI and SSEBA benefits in adjusted gross 

income and estimates the amounts to be transferred to the corresponding trust funds plus the 

FHI (Medicare) trust fund.3

 Subsequently, OTA makes adjustments to correct the amounts 

put into each fund. Throughout the report, some tables will show benefits and/or tax liability 

by income source (FOASI, FDI or SSEBA benefits) while others will show the amounts 

transferred to the various trust funds (FOASI, FDI, SSEBA or FHI). 

II. Summary 

The Summary Table shows OTA’s original tax liability estimates by benefit source 

and the transfers made to the trust funds based on those estimates, the adjusting transfers 

subsequently made, and the resulting net amounts transferred to each trust fund for each 

calendar year. For example, for calendar year 1997, OTA initially estimated that the tax 

liability attributable to partial inclusion of Social Security and Railroad Social Security 

Equivalent benefits was $12,936 million. Based on this estimate, transfers of $7,561 million, 

$458 million, $4,856 million, and $61 million were made from the general fund to the 

FOASI, FDI, FHI, and SSEBA trust funds, respectively. OTA subsequently determined that 

2 
the amount of tax liability calculated from actual 1997 tax return data exceeded the amount 

transferred by $1,461 million. Transfers to the FOASI, FDI, FHI, and SSEBA trust funds 

were understated by $793 million, $37 million, $606 million, and $25 million, respectively. 

Correcting adjustments to the FOASI, FDI, and SSEBA trust funds were made in July 2000 

and October 2001. Correcting adjustments to the FHI trust fund were made in September 

2000 and September 2001.4 The resulting net amount transferred for calendar year 1997 

liability was $14,397 million. Of this amount, $8,354 was transferred to the FOASI trust 

fund, $495 million was transferred to the FDI trust fund, $5,462 was transferred to the FHI 

trust fund, and $86 million was transferred to the SSEBA trust fund. 

This report provides the detail supporting the tax liability and transfer amounts. 

Chapter 1 presents OTA’s methodology for estimating the tax liability attributable to the 

inclusion of benefits in AGI and presents a comparison of estimates to actual amounts of 

income tax liability calculated from tax return data for calendar years 1997 through 2004. 

Chapter 2 presents the methodologies for estimating the initial amounts to be transferred to 

the trust funds and the subsequent correcting adjustments. The chapter also presents those 

initial transfer amounts and the correcting adjustments for 1997 through 2004 liabilities. 

Chapter 3 presents the forecast of transfers of estimated amounts to the trust funds for 

calendar years 2005 through 2009. Chapter 4 describes the distribution of taxable benefits 

by income class for calendar years 1997 through 2004. It also contains an analysis of the 

sources of provisional income for taxpayers with taxable benefits for the 1995 through 2004 

period. 

3 
Summary Table 

Calendar Years; Millions of Dollars 

1997 1998 1999 2000 2001 2002 2003 2004 

Original Liability Estimate Attributable To 

FOASI Benefits 12,169 14,645 15,145 17,579 19,443 19,633 18,841 20,754 

FDI Benefits 674 853 881 1,070 1,219 1,300 1,265 1,505 

SSEBA Benefits 93 121 124 157 151 150 152 163 

Total Original Liability Estimates 12,936 15,619 16,150 18,806 20,813 21,083 20,258 22,422 

Original Transfers Made To 

FOASI Trust Fund 7,561 9,003 9,219 10,445 11,982 12,574 11,466 12,831 

FDI Trust Fund 458 552 572 662 822 902 851 1,017 

FHI Trust Fund 4,856 5,990 6,280 7,597 7,915 7,510 7,844 8,465 

SSEBA Trust Fund 61 74 79 102 94 97 97 109 

Total Original Transfers 12,936 15,619 16,150 18,806 20,813 21,083 20,258 22,422 

Subsequent Correcting Adjustments Made To 

FOASI Trust Fund Transfers 793 189 885 1,614 48 -1,135 -842 -1,167 

FDI Trust Fund Transfers 37 22 88 88 -27 -92 -95 -102 

FHI Trust Fund Transfers 606 181 655 807 357 143 -796 -515 

SSEBA Trust Fund Transfers 25 14 15 3 6 -4 -12 -18 

Total Trust Fund Transfers 1,461 406 1,643 2,512 384 -1,088 -1,745 -1,802 

Net Amounts Transferred To 

FOASI Trust Fund 8,354 9,192 10,104 12,059 12,030 11,439 10,624 11,664 

FDI Trust Fund 495 574 660 750 795 810 756 915 

FHI Trust Fund 5,462 6,171 6,935 8,404 8,272 7,653 7,048 7,950 

SSEBA Trust Fund 86 88 94 105 100 93 85 91 

Total Net Amounts 14,397 16,025 17,793 21,318 21,197 19,995 18,513 20,620 

Department of the Treasury
 

Office of Tax Analysis
 

4 
CHAPTER 1: METHODOLOGY AND ESTIMATES OF THE TAX 

LIABILITY ATTRIBUTABLE TO THE TAXATION OF BENEFITS FOR 

CALENDAR YEARS 1997 THROUGH 2004 

I. Methodology for Estimating Tax Liability 

The Office of Tax Analysis (OTA) is responsible for estimating the annual tax 

liability attributable to the partial inclusion of Social Security and Railroad Social Security 

Equivalent benefits received in AGI, making quarterly transfers from the general fund to the 

trust funds based on these estimates, and calculating correcting adjustments to amounts 

initially transferred. OTA provides this information to the Treasury Department's Financial 

Management Services, which has the authority to transfer funds between the general revenue 

fund and the trust funds as necessary. 

OTA estimated the amount of tax liability for each of the years 1997 through 2004 

attributable to the inclusion of Social Security benefits in AGI using results from OTA’s 

Individual Income Tax Model (ITM).5, 6 The ITM is OTA’s primary tool for preparing 

revenue estimates and analyzing taxpayer behavior. For this application, the ITM was used 

to account for changes in other tax provisions resulting from the inclusion of benefits in 

AGI. That is, the use of deductions and credits, as well as the calculations of alternative 

minimum tax liabilities, can be affected by the inclusion of benefits in AGI.7 

The ITM is built on a stratified random sample of individual income tax returns 

contained in the Internal Revenue Service’s Statistics of Income (SOI) file. ITM 

computations are weighted to produce results that are representative of the entire population 

of taxpayers. Tax returns alone, however, do not provide sufficient data to estimate the tax 

liability effects of the partial inclusion of Social Security and Railroad Social Security 

Equivalent benefits in AGI. Therefore, imputations are added to the ITM to compensate for 

the missing data. The Social Security Administration and the Railroad Retirement Board 

provide information on the total amounts of benefits paid to recipients. These amounts are 

distributed among appropriate taxpayers on the ITM using, as a guide, two important data 

sources: (1) a file of Form SSA-1099 and Form RRB-1099 information returns that are 

matched to the SOI file; and (2) Current Population Survey data from the Census Bureau to 

aid in matching benefits to recipients who were not required to file a tax return. Records on 

the ITM are extrapolated to future years in accordance with the President’s macroeconomic 

forecast in use at the time of the extrapolation. As part of the extrapolation, total Social 

Security and Railroad Social Security Equivalent benefits are projected to grow at the rate 

indicated in the benefits forecast provided by the Social Security Administration and the 

Railroad Retirement Board. 

The base year for the ITM extrapolation is updated approximately every three years. 

Estimates for tax years 1997 through 2000 were made using a 1995-based ITM. That is, 

OTA extrapolated sample tax returns, SSA-1099 forms, RRB-1099 forms, and CPS data for 

1995. Estimates for tax years 2001 through 2003 were made using a 1998-based ITM. OTA 

extrapolated sample tax returns, SSA-1099 forms, RRB-1099 forms and CPS data for 1998. 

5 
Estimates for 2004 were made using a 2001-based ITM. OTA extrapolated sample tax 

returns, SSA-1099 forms, RRB-1099 forms and CPS data for 2001. 

The ITM uses the tax return information, the imputations, and extrapolations to 

estimate the level of Social Security and Railroad Social Security Equivalent benefits 

included in AGI and the Federal income tax liability attributable to the inclusion of those 

benefits for all of the filing units on the model. To do this, each tax unit’s liability is 

estimated with and without the inclusion of benefits. The difference between those two 

levels of tax liability equals the tax liability attributable to the inclusion of benefits. The 

ITM results are used to calculate both the percentage of total benefits included in AGI and 

the average effective marginal tax rates applicable to the taxable benefits. Final estimates of 

tax liability attributable to the partial inclusion of benefits are produced using a spreadsheetbased model. This model blends the estimates of the percent of benefits in AGI and the 

average effective marginal tax rates with more recent tax return information (not available 

when the ITM is extrapolated) and the most current tax collection information. 

The Social Security Amendments of 1983 require adjustments to the trust funds if 

actual tax return data subsequently reveal that the initial transfers were incorrect. To 

calculate the actual tax liability for each of the calendar years 1997 through 2004, the IRS 

created data files for each year based on Form 1040 records. All filers who reported taxable 

Social Security or Railroad Social Security Equivalent benefits on their Form 1040 were 

included in these data files (as opposed to the data used to determine the original transfer 

estimates, which are sample data). The methodology for determining the adjustments is 

discussed in Chapter 2, Section II. 

II. Estimates of Tax Liability Attributable to the Taxation of Benefits in 

Calendar Years 1997 to 2004 

Tables 1.A through 1.H compare the assumptions and parameters used to determine 

the estimates of tax liability with the parameters calculated from actual tax return and benefit 

data for each calendar year from 1997 to 2004. As noted above, the former are determined 

from a base year of SOI sample data, other data sources, and an extrapolation algorithm 

while the latter are based on IRS population data. The patterns of benefit inclusion and tax 

liability are generally constant for each calendar year. 

 For example, the top section of Table 1.A shows that OTA estimated that $54,856 

million of $366,793 million in total benefits (14.96 percent) would be included in AGI for 

calendar year 1997. The estimated tax liability attributable to those benefits was $12,936 

million, for an average effective marginal tax rate of 23.58 percent. The bottom section of 

the table shows that, based on calendar year 1997 tax return and benefits data, $60,897 

million of $366,201 million in total benefits (16.63 percent) were included in AGI. The 

actual tax liability attributable to those benefits was $14,397 million, for an average effective 

marginal tax rate of 23.64 percent. 

Continuing the example, the total liability estimate for calendar year 1997 was the 

sum of the estimates of the tax liability attributable to the partial inclusion of FOASI, FDI, 

6 
 

and SSEBA benefits. The top section of Table 1.A shows that OTA estimated that $51,045 

million of $314,703 million of FOASI benefits (16.22 percent) would be included in AGI. 

The estimated tax liability attributable to those benefits was $12,169 million, for an average 

effective marginal tax rate of 23.84 percent. The bottom section of the table shows that, 

based on calendar year 1997 tax return and benefits data, $56,630 million of $315,477 

million in FOASI benefits (17.95 percent) were included in AGI. The actual tax liability 

attributable to those benefits was $13,503 million, for an average effective marginal tax rate 

of 23.84 percent. 

Recipients of FDI benefits have, on average, lower incomes than FOASI 

beneficiaries. Therefore, the estimated inclusion rates for benefits in AGI and average 

effective marginal tax rates for FDI beneficiaries are lower than those for FOASI recipients. 

The top section of Table 1.A shows that OTA estimated that $3,348 million of $47,050 

million in FDI benefits (7.12 percent) would be included in AGI. The estimated tax liability 

attributable to those benefits was $674 million, for an average effective marginal tax rate of 

20.13 percent. The bottom section of the table shows that, based on calendar year 1997 tax 

return and benefits data, $3,705 million of $45,660 million in FDI benefits (8.11 percent) 

were included in AGI. The actual tax liability attributable to those benefits was $767 million, 

for an average effective marginal tax rate of 20.70 percent. 

Railroad SSEBA beneficiaries have, on average, incomes that are slightly lower than 

FOASI beneficiaries but higher than FDI recipients. The top section of Table 1.A shows that 

OTA estimated that $463 million of $5,040 million in SSEBA benefits (9.19 percent) would 

be included in AGI. The estimated tax liability attributable to those included benefits was 

$93 million, for an average effective marginal tax rate of 20.08 percent. The bottom section 

of the table shows that, based on calendar year 1997 tax return and benefits data, $562 

million of $5,064 million in SSEBA benefits (11.10 percent) were included in AGI. The 

actual tax liability attributable to included SSEBA benefits was $127 million, for an average 

effective marginal tax rate of 22.60 percent. 

7 
 

 

 

 

 

 

 

 

 

 

 

Table 1.A
 

Comparison of Parameters Used to Estimate Tax Liability Attributable to the
 

Partial Inclusion of Benefits in AGI with Parameters Calculated from Actual Amounts
 

Calendar Year 1997 /1
 

Tax Liabilities Average Effective 

Total Benefits Percent of on Benefits Marginal Tax Rate 

Benefits Includable Total Benefits Includable on Benefits 

Benefit Source Paid /2 in AGI /2 Includable in AGI In AGI /2 Includable In AGI 

Estimate Parameters /3 

Federal Old-Age and Survivors Insurance 314,703 51,045 16.22% 12,169 23.84% 

Federal Disability Insurance 47,050 3,348 7.12% 674 20.13% 

Railroad Social Security Equivalent Benefits 5,040 463 9.19% 93 20.08%

 Total 366,793 54,856 14.96% 12,936 23.58% 

Actual Parameters /4 

Federal Old-Age and Survivors Insurance 315,477 56,630 17.95% 13,503 23.84% 

Federal Disability Insurance 45,660 3,705 8.11% 767 20.70% 

Railroad Social Security Equivalent Benefits 5,064 562 11.10% 127 22.60%

 Total 366,201 60,897 16.63% 14,397 23.64% 

Department of the Treasury
 

Office of Tax Analysis
 

1/ Estimated tax liabilities were updated on a semi-annual basis to conform with updates to the President's macroeconomic assumptions.
 

The table compares the parameters used in the final estimates of tax liability with the parameters derived from actual tax return and benefits data.
 

Rounding of results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the FOASI or FDI benefits paid figures.
 

2/ Benefits amounts and tax liabilities in millions of dollars, excluding benefits paid to non-resident aliens.
 

3/ The total benefits paid data are estimates provided by the Social Security Administration and the Railroad Retirement Board; the other data are
 

estimated from the Office of Tax Analysis Individual Income Tax Model.
 

4/ The total benefits paid data are derived from the 2007 Annual Statistical Supplement to the Social Security Bulletin (Tables 4.A1 and 4.A2), the
 

Social Security Administration and the Railroad Retirement Board; the Benefits in AGI and tax liability data come from the Internal Revenue Service's
 

Individual Master File.
 

8 
 

 

 

 

 

 

 

 

 

 

 

Table 1.B
 

Comparison of Parameters Used to Estimate Tax Liability Attributable to the
 

Partial Inclusion of Benefits in AGI with Parameters Calculated from Actual Amounts
 

Calendar Year 1998 /1
 

Tax Liabilities Average Effective 

Total Benefits Percent of on Benefits Marginal Tax Rate 

Benefits Includable Total Benefits Includable on Benefits 

Benefit Source Paid /2 in AGI /2 Includable in AGI In AGI /2 Includable In AGI 

Estimate Parameters /3 

Federal Old-Age and Survivors Insurance 326,347 61,720 18.91% 14,645 23.73% 

Federal Disability Insurance 48,393 4,103 8.48% 853 20.79% 

Railroad Social Security Equivalent Benefits 5,082 551 10.84% 121 21.97%

 Total 379,822 66,374 17.48% 15,619 23.53% 

Actual Parameters /4 

Federal Old-Age and Survivors Insurance 326,189 62,811 19.26% 14,999 23.88% 

Federal Disability Insurance 48,182 4,328 8.98% 895 20.68% 

Railroad Social Security Equivalent Benefits 5,089 608 11.95% 131 21.55%

 Total 379,460 67,747 17.85% 16,025 23.65% 

Department of the Treasury
 

Office of Tax Analysis
 

1/ Estimated tax liabilities were updated on a semi-annual basis to conform with updates to the President's macroeconomic assumptions.
 

The table compares the parameters used in the final estimates of tax liability with the parameters derived from actual tax return and benefits data.
 

Rounding of results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the FOASI or FDI benefits paid figures.
 

2/ Benefits amounts and tax liabilities in millions of dollars, excluding benefits paid to non-resident aliens.
 

3/ The total benefits paid data are estimates provided by the Social Security Administration and the Railroad Retirement Board; the other data are
 

estimated from the Office of Tax Analysis Individual Income Tax Model.
 

4/ The total benefits paid data are derived from the 2007 Annual Statistical Supplement to the Social Security Bulletin (Tables 4.A1 and 4.A2), the
 

Social Security Administration and the Railroad Retirement Board; the Benefits in AGI and tax liability data come from the Internal Revenue Service's
 

Individual Master File.
 

9 
 

 

 

 

 

 

 

 

 

 

 

Table 1.C
 

Comparison of Parameters Used to Estimate Tax Liability Attributable to the
 

Partial Inclusion of Benefits in AGI with Parameters Calculated from Actual Amounts
 

Calendar Year 1999 /1
 

Tax Liabilities Average Effective 

Total Benefits Percent of on Benefits Marginal Tax Rate 

Benefits Includable Total Benefits Includable on Benefits 

Benefit Source Paid /2 in AGI /2 Includable in AGI In AGI /2 Includable In AGI 

Estimate Parameters /3 

Federal Old-Age and Survivors Insurance 334,466 64,304 19.23% 15,145 23.55% 

Federal Disability Insurance 51,068 4,270 8.36% 881 20.63% 

Railroad Social Security Equivalent Benefits 5,078 569 11.20% 124 21.81%

 Total 390,612 69,142 17.70% 16,150 23.36% 

Actual Parameters /4 

Federal Old-Age and Survivors Insurance 333,847 68,532 20.53% 16,611 24.24% 

Federal Disability Insurance 51,359 4,951 9.64% 1,038 20.97% 

Railroad Social Security Equivalent Benefits 5,076 664 13.08% 144 21.69%

 Total 390,282 74,147 19.00% 17,793 24.00% 

Department of the Treasury
 

Office of Tax Analysis
 

1/ Estimated tax liabilities were updated on a semi-annual basis to conform with updates to the President's macroeconomic assumptions.
 

The table compares the parameters used in the final estimates of tax liability with the parameters derived from actual tax return and benefits data.
 

Rounding of results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the FOASI or FDI benefits paid figures.
 

2/ Benefits amounts and tax liabilities in millions of dollars, excluding benefits paid to non-resident aliens.
 

3/ The total benefits paid data are estimates provided by the Social Security Administration and the Railroad Retirement Board; the other data are
 

estimated from the Office of Tax Analysis Individual Income Tax Model.
 

4/ The total benefits paid data are derived from the 2007 Annual Statistical Supplement to the Social Security Bulletin (Tables 4.A1 and 4.A2), the
 

Social Security Administration and the Railroad Retirement Board; the Benefits in AGI and tax liability data come from the Internal Revenue Service's
 

Individual Master File.
 

10 
 

 

 

 

 

 

 

 

 

 

 

Table 1.D
 

Comparison of Parameters Used to Estimate Tax Liability Attributable to the
 

Partial Inclusion of Benefits in AGI with Parameters Calculated from Actual Amounts
 

Calendar Year 2000 /1
 

Tax Liabilities Average Effective 

Total Benefits Percent of on Benefits Marginal Tax Rate 

Benefits Includable Total Benefits Includable on Benefits 

Benefit Source Paid /2 in AGI /2 Includable in AGI In AGI /2 Includable In AGI 

Estimate Parameters /3 

Federal Old-Age and Survivors Insurance 352,195 75,815 21.53% 17,579 23.19% 

Federal Disability Insurance 54,922 4,960 9.03% 1,070 21.57% 

Railroad Social Security Equivalent Benefits 5,100 702 13.76% 157 22.38%

 Total 412,216 81,476 19.77% 18,806 23.08% 

Actual Parameters /4 

Federal Old-Age and Survivors Insurance 352,109 81,649 23.19% 19,974 24.46% 

Federal Disability Insurance 54,961 5,691 10.35% 1,182 20.77% 

Railroad Social Security Equivalent Benefits 5,125 751 14.66% 162 21.57%

 Total 412,195 88,091 21.37% 21,318 24.20% 

Department of the Treasury
 

Office of Tax Analysis
 

1/ Estimated tax liabilities were updated on a semi-annual basis to conform with updates to the President's macroeconomic assumptions.
 

The table compares the parameters used in the final estimates of tax liability with the parameters derived from actual tax return and benefits data.
 

Rounding of results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the FOASI or FDI benefits paid figures.
 

2/ Benefits amounts and tax liabilities in millions of dollars, excluding benefits paid to non-resident aliens.
 

3/ The total benefits paid data are estimates provided by the Social Security Administration and the Railroad Retirement Board; the other data are
 

estimated from the Office of Tax Analysis Individual Income Tax Model.
 

4/ The total benefits paid data are derived from the 2007 Annual Statistical Supplement to the Social Security Bulletin (Tables 4.A1 and 4.A2), the
 

Social Security Administration and the Railroad Retirement Board; the Benefits in AGI and tax liability data come from the Internal Revenue Service's
 

Individual Master File.
 

11 
 

 

 

 

 

 

 

 

 

 

 

Table 1.E
 

Comparison of Parameters Used to Estimate Tax Liability Attributable to the
 

Partial Inclusion of Benefits in AGI with Parameters Calculated from Actual Amounts
 

Calendar Year 2001 /1
 

Tax Liabilities Average Effective 

Total Benefits Percent of on Benefits Marginal Tax Rate 

Benefits Includable Total Benefits Includable on Benefits 

Benefit Source Paid /2 in AGI /2 Includable in AGI In AGI /2 Includable In AGI 

Estimate Parameters /3 

Federal Old-Age and Survivors Insurance 372,385 84,466 22.68% 19,443 23.02% 

Federal Disability Insurance 59,714 5,949 9.96% 1,219 20.49% 

Railroad Social Security Equivalent Benefits 5,207 755 14.51% 151 19.99%

 Total 437,306 91,171 20.85% 20,813 22.83% 

Actual Parameters /4 

Federal Old-Age and Survivors Insurance 371,770 84,315 22.68% 19,797 23.48% 

Federal Disability Insurance 59,596 6,239 10.47% 1,248 20.00% 

Railroad Social Security Equivalent Benefits 5,225 733 14.04% 152 20.72%

 Total 436,591 91,287 20.91% 21,197 23.22% 

Department of the Treasury
 

Office of Tax Analysis
 

1/ Estimated tax liabilities were updated on a semi-annual basis to conform with updates to the President's macroeconomic assumptions.
 

The table compares the parameters used in the final estimates of tax liability with the parameters derived from actual tax return and benefits data.
 

Rounding of results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the FOASI or FDI benefits paid figures.
 

2/ Benefits amounts and tax liabilities in millions of dollars, excluding benefits paid to non-resident aliens.
 

3/ The total benefits paid data are estimates provided by the Social Security Administration and the Railroad Retirement Board; the other data are
 

estimated from the Office of Tax Analysis Individual Income Tax Model.
 

4/ The total benefits paid data are derived from the 2007 Annual Statistical Supplement to the Social Security Bulletin (Tables 4.A1 and 4.A2), the
 

Social Security Administration and the Railroad Retirement Board; the Benefits in AGI and tax liability data come from the Internal Revenue Service's
 

Individual Master File.
 

12 
 

 

 

 

 

 

 

 

 

 

 

Table 1.F
 

Comparison of Parameters Used to Estimate Tax Liability Attributable to the
 

Partial Inclusion of Benefits in AGI with Parameters Calculated from Actual Amounts
 

Calendar Year 2002 /1
 

Tax Liabilities Average Effective 

Total Benefits Percent of on Benefits Marginal Tax Rate 

Benefits Includable Total Benefits Includable on Benefits 

Benefit Source Paid /2 in AGI /2 Includable in AGI In AGI /2 Includable In AGI 

Estimate Parameters /3 

Federal Old-Age and Survivors Insurance 387,349 92,109 23.78% 19,633 21.32% 

Federal Disability Insurance 68,856 6,704 9.74% 1,300 19.39% 

Railroad Social Security Equivalent Benefits 5,283 775 14.67% 150 19.35%

 Total 461,488 99,587 21.58% 21,083 21.17% 

Actual Parameters /4 

Federal Old-Age and Survivors Insurance 387,546 84,406 21.78% 18,647 22.09% 

Federal Disability Insurance 65,680 6,344 9.66% 1,207 19.03% 

Railroad Social Security Equivalent Benefits 5,269 719 13.65% 141 19.61%

 Total 458,495 91,469 19.95% 19,995 21.86% 

Department of the Treasury
 

Office of Tax Analysis
 

1/ Estimated tax liabilities were updated on a semi-annual basis to conform with updates to the President's macroeconomic assumptions.
 

The table compares the parameters used in the final estimates of tax liability with the parameters derived from actual tax return and benefits data.
 

Rounding of results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the FOASI or FDI benefits paid figures.
 

2/ Benefits amounts and tax liabilities in millions of dollars, excluding benefits paid to non-resident aliens.
 

3/ The total benefits paid data are estimates provided by the Social Security Administration and the Railroad Retirement Board; the other data are
 

estimated from the Office of Tax Analysis Individual Income Tax Model.
 

4/ The total benefits paid data are derived from the 2007 Annual Statistical Supplement to the Social Security Bulletin (Tables 4.A1 and 4.A2), the
 

Social Security Administration and the Railroad Retirement Board; the Benefits in AGI and tax liability data come from the Internal Revenue Service's
 

Individual Master File.
 

13 
 

 

 

 

 

 

 

 

 

 

 

Table 1.G
 

Comparison of Parameters Used to Estimate Tax Liability Attributable to the
 

Partial Inclusion of Benefits in AGI with Parameters Calculated from Actual Amounts
 

Calendar Year 2003 /1
 

Tax Liabilities Average Effective 

Total Benefits Percent of on Benefits Marginal Tax Rate 

Benefits Includable Total Benefits Includable on Benefits 

Benefit Source Paid /2 in AGI /2 Includable in AGI In AGI /2 Includable In AGI 

Estimate Parameters /3 

Federal Old-Age and Survivors Insurance 398,920 88,188 22.11% 18,841 21.36% 

Federal Disability Insurance 70,575 6,717 9.52% 1,265 18.83% 

Railroad Social Security Equivalent Benefits 5,308 802 15.11% 152 18.95%

 Total 474,803 95,707 20.16% 20,258 21.17% 

Actual Parameters /4 

Federal Old-Age and Survivors Insurance 399,272 84,315 21.12% 17,202 20.40% 

Federal Disability Insurance 70,913 6,239 8.80% 1,184 18.98% 

Railroad Social Security Equivalent Benefits 5,285 733 13.88% 127 17.31%

 Total 475,470 91,287 19.20% 18,513 20.28% 

Department of the Treasury
 

Office of Tax Analysis
 

1/ Estimated tax liabilities were updated on a semi-annual basis to conform with updates to the President's macroeconomic assumptions.
 

The table compares the parameters used in the final estimates of tax liability with the parameters derived from actual tax return and benefits data.
 

Rounding of results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the FOASI or FDI benefits paid figures.
 

2/ Benefits amounts and tax liabilities in millions of dollars, excluding benefits paid to non-resident aliens.
 

3/ The total benefits paid data are estimates provided by the Social Security Administration and the Railroad Retirement Board; the other data are
 

estimated from the Office of Tax Analysis Individual Income Tax Model.
 

4/ The total benefits paid data are derived from the 2007 Annual Statistical Supplement to the Social Security Bulletin (Tables 4.A1 and 4.A2), the
 

Social Security Administration and the Railroad Retirement Board; the Benefits in AGI and tax liability data come from the Internal Revenue Service's
 

Individual Master File.
 

14 
 

 

 

 

 

 

 

 

 

 

 

Table 1.H
 

Comparison of Parameters Used to Estimate Tax Liability Attributable to the
 

Partial Inclusion of Benefits in AGI with Parameters Calculated from Actual Amounts
 

Calendar Year 2004 /1
 

Tax Liabilities Average Effective 

Total Benefits Percent of on Benefits Marginal Tax Rate 

Benefits Includable Total Benefits Includable on Benefits 

Benefit Source Paid /2 in AGI /2 Includable in AGI In AGI /2 Includable In AGI 

Estimate Parameters /3 

Federal Old-Age and Survivors Insurance 426,997 104,810 24.55% 20,754 19.80% 

Federal Disability Insurance 83,224 8,446 10.15% 1,505 17.82% 

Railroad Social Security Equivalent Benefits 5,340 935 17.51% 163 17.43%

 Total 515,562 114,191 22.15% 22,422 19.64% 

Actual Parameters /4 

Federal Old-Age and Survivors Insurance 414,456 97,468 23.52% 19,030 19.52% 

Federal Disability Insurance 78,208 8,712 11.14% 1,452 16.67% 

Railroad Social Security Equivalent Benefits 5,359 800 14.93% 138 17.24%

 Total 498,023 106,981 21.48% 20,620 19.27% 

Department of the Treasury
 

Office of Tax Analysis
 

1/ Estimated tax liabilities were updated on a semi-annual basis to conform with updates to the President's macroeconomic assumptions.
 

The table compares the parameters used in the final estimates of tax liability with the parameters derived from actual tax return and benefits data.
 

Rounding of results may prevent exact matching of total. Benefits paid to non-resident aliens are not included in the FOASI or FDI benefits paid figures.
 

2/ Benefits amounts and tax liabilities in millions of dollars, excluding benefits paid to non-resident aliens.
 

3/ The total benefits paid data are estimates provided by the Social Security Administration and the Railroad Retirement Board; the other data are
 

estimated from the Office of Tax Analysis Individual Income Tax Model.
 

4/ The total benefits paid data are derived from the 2007 Annual Statistical Supplement to the Social Security Bulletin (Tables 4.A1 and 4.A2), the
 

Social Security Administration and the Railroad Retirement Board; the Benefits in AGI and tax liability data come from the Internal Revenue Service's
 

Individual Master File.
 

15 
 

CHAPTER 2: METHODOLOGY FOR ESTIMATING TRANSFERS AND 

CALCULATING ADJUSTMENTS TO TRANSFERS OF LIABLITY IN 

CALENDAR YEARS 1997 THROUGH 2004 

I. Methodology for Estimating Quarterly Transfer Amounts 

Based on the estimates of annual liability given in Chapter 1, the Department of the 

Treasury’s Office of Tax Analysis constructed estimates of the quarterly transfers from the 

general fund to the FOASI, FDI, FHI, and SSEBA trust funds. Since OBRA 93 created the 

second thresholds for inclusion of benefits in AGI, and directed that the additional tax 

liability be directed to the FHI trust fund, OTA estimated the annual liability attributable to 

the inclusion of FOASI, FDI, and SSEBA benefits in AGI on both a pre-OBRA 93 and a 

post-OBRA 93 basis. The amounts of liability transferable to the FOASI, FDI, and SSEBA 

trust funds were the pre-OBRA 93 liability estimates. The amount of liability transferable to 

the FHI trust fund was taken as the difference between the post-OBRA 93 total liability 

estimate and the pre-OBRA 93 total liability estimate. OTA then estimated the quarterly 

transfer amounts associated with the current and subsequent calendar years. Separate 

methodologies were used to transfer the pre-OBRA 93 and post-OBRA 93 quarterly amounts 

due to differences in statutory requirements. 

With respect to pre-OBRA 93 transfers, statutory requirements dictate that liability 

should be transferred quarterly as it accrues. Therefore, the quarterly transfers are made on 

the first day of the calendar quarters beginning with the months of January, April, July, and 

October. For a given liability year, the total amounts transferable to the FOASI, FDI, or 

SSEBA trust funds are the amounts of liability estimated from the most recent forecast of 

estimated annual liability, less any amounts of liability already transferred for that year. This 

net difference is divided over the remaining quarters still available for transfers. 

With respect to post-OBRA 93 transfers, statutory requirements dictate that liability 

should be transferred quarterly as it is collected. Therefore, that calendar year liability is 

transferred in five installments, representing four quarterly estimated payments and one final 

payment of liability. Transfers to the FHI trust fund are made on the fifteenth day of the 

quarter beginning with the months April, June, September, and January. The total April 15 

transfer to the FHI trust fund always contains two installments – one estimated payment for 

the current year’s liability and one final payment for the prior year’s liability. For a given 

liability year, the total amount transferable to the FHI trust fund is the amount of liability 

estimated from the most recent forecast of estimated annual liability, less any amounts of 

liability already transferred for that year. This net difference is divided over the remaining 

installment periods still available for transfers. 

16 
 

 

II. Methodology for Adjustments to Transfers of Estimated Amounts 

The Social Security Amendments of 1983 require adjustments to the trust funds if 

actual tax return data subsequently reveal that the initial transfers were incorrect. To 

calculate the actual tax liability for each of the calendar years 1997 through 2004 resulting 

from the partial taxation of Social Security and Railroad Social Security Equivalent benefits, 

the IRS creates data files for each year based on Form 1040 records. All filers who report 

taxable Social Security or Railroad Social Security Equivalent benefits on their Form 1040 

are included in these data files. Although the Form 1040 provides information on the total 

amount of benefits includable in taxable income, it does not indicate whether the filer 

received FOASI, FDI, or SSEBA benefits. Such information is needed to allocate revenues 

accurately to the trust funds. To obtain this information, the Form 1040 records belonging to 

those beneficiaries who reported taxable benefits are matched to Form SSA-1099 records 

provided by the Social Security Administration and Form RRB-1099 records provided by the 

Railroad Retirement Board.8 

Using this matched file of Form 1040 and Form SSA-1099 and RRB-1099 records, 

the IRS calculates the tax liability attributable to the taxation of Social Security and Railroad 

Social Security Equivalent benefits, for both pre-OBRA 93 and post-OBRA 93 liability. For 

each taxpayer, the total tax liability attributable to the taxation of benefits is calculated as the 

difference between tax liability with and without benefits included in AGI. The pre-OBRA 

93 tax liability is calculated as the difference between tax liability with benefits includable 

under pre-OBRA 93 law and with no included benefits. The post-OBRA 93 tax liability is 

the difference between the total tax liability and the pre-OBRA 93 tax liability. The total 

difference taken over all taxpayers equals the tax liability attributable to the taxation of 

benefits. 

After comparing the IRS liability calculations with the OTA liability estimates, OTA 

calculates adjustments to the original transfers. These adjustment amounts are equal to the 

difference between the IRS liability calculations and OTA’s original liability estimates. The 

adjustment amounts are included in the transfer amounts in the first quarter following their 

determination. Thus, the net transfer for that quarter reflects the transfer for the current 

period liability and the adjustment to the estimate of prior period liability. 

III.	 Transfers of Estimated Amounts and Adjustments to Transfers for 

Liability in Calendar Years 1997 through 2004 

Table 2 shows the estimated liability amounts transferred to the FOASI, FDI, FHI 

and SSEBA trust funds in each calendar year from 1997 to 2004. For example, in calendar 

year 1997, total transfers of $7,561 million, $458 million, and $61 million were made to the 

FOASI, FDI, and SSEBA trust funds, respectively, and total transfers of $4,856 million were 

made to the FHI trust fund. As noted in section I, amounts were transferred quarterly to the 

FOASI, FDI and SSEBA trust funds between January 1 and October 1 of the relevant year. 

Amounts were transferred quarterly to the FHI trust fund between April 15th of the relevant 

year and April 15th of the succeeding year. 

17 
Table 2 also shows the IRS calculations of final trust fund amounts, and the resulting 

adjustments to the FOASI, FDI, FHI, and SSEBA trust funds due to the reconciliation of 

OTA estimates and IRS calculations. For example, as a result of the reconciliation of 

estimated and actual 1997 tax liability, adjustments of $793 million, $37 million, $606 

million, and $25 million were made, for the FOASI, FDI, FHI, and SSEBA trust funds, 

respectively. The final column of Table 2 shows the quarter in which each adjustment was 

made. 

18 
 

Table 2
 

Comparison of OTA Estimated Transfers, IRS Calculated Transfers, and
 

Corresponding Adjustments for Calendar Years 1997 to 2004 /1
 

OTA IRS 

Estimated Calculated Adjustment Adjustment 

Year and Trust Fund Transfers Transfers Amount Quarter 

CY 1997 Liability 

FOASI 7,561 8,354 793 /2
 

FDI 458 495 37 /2
 

FHI 4,856 5,462 606 /2
 

SSEBA 61 86 25 /2

 Total 12,936 14,397 1,461
 

CY 1998 Liability 

FOASI 9,003 9,192 189 October 1, 2002 

FDI 552 574 22 October 1, 2002 

FHI 5,990 6,171 181 September 15, 2002 

SSEBA 74 88 14 October 1, 2002

 Total 15,619 16,025 406 

CY 1999 Liability 

FOASI 9,219 10,104 885 October 1, 2003 

FDI 572 660 88 October 1, 2003 

FHI 6,280 6,935 655 September 15, 2003 

SSEBA 79 94 15 October 1, 2003

 Total 16,150 17,793 1,643 

CY 2000 Liability 

FOASI 10,445 12,059 1,614 October 1, 2004 

FDI 662 750 88 October 1, 2004 

FHI 7,597 8,404 807 September 15, 2004 

SSEBA 102 105 3 October 1, 2004

 Total 18,806 21,318 2,512 

CY 2001 Liability 

FOASI 11,982 12,030 48 April 1, 2006
 

FDI 822 795 -27 April 1, 2006
 

FHI 7,915 8,272 357 June 15, 2006
 

SSEBA 94 100 6 April 1, 2006

 Total 20,813 21,197 384
 

CY 2002 Liability 

FOASI 12,574 11,439 -1,135 April 1, 2008 

FDI 902 810 -92 April 1, 2008 

FHI 7,510 7,653 143 January 15, 2008 

SSEBA 97 93 -4 April 1, 2008

 Total 21,083 19,995 -1,088 

CY 2003 Liability 

FOASI 11,466 10,624 -842 July 1, 2008 

FDI 851 756 -95 July 1, 2008 

FHI 7,844 7,048 -796 September 15, 2008 

SSEBA 97 85 -12 July 1, 2008

 Total 20,258 18,513 -1,745 

CY 2004 Liability 

FOASI 12,831 11,664 -1,167 October 1, 2008 

FDI 1,017 915 -102 October 1, 2008 

FHI 8,465 7,950 -515 January 15, 2009 

SSEBA 109 91 -18 October 1, 2008

 Total 22,422 20,620 -1,802 

Department of the Treasury

 Office of Tax Analysis 

1/ Amounts in millions of dollars. 

2/ This adjustment was made in two steps. Preliminary adjustments of $1,010 million, $53 million, and $26 million 

to the FOASI, FDI, and SSEBA trust funds, respectively, were included with the July 1, 2000 transfer. A preliminary 

adjustment of $813 million to the FHI trust fund was included with the September 15, 2000 transfer. Subsequent 

to these adjustments, IRS issued new totals for calendar year 1997 tax liability. Second adjustments of -$217 

million, -$16 million, and -$1 million to the FOASI, FDI, and SSEBA trust funds, respectively, were included with 

the October 1, 2001 transfer. A second adjustment of -$207 million to the FHI trust fund was included with the 

September 15, 2001 transfer. The total net adjustments were adjustments of $793 million, $37 million, $606 million, 

and $25 million, for the FOASI, FDI, FHI, and SSEBA trust funds, respectively. 

19 
CHAPTER 3: FORECAST OF TRANSFERS TO TRUST FUNDS FOR 

CALENDAR YEARS 2005 TO 2009 

I. Forecasting Methodology 

The Social Security Amendments of 1983 require that the annual report include a 

forecast of transfers to the trust funds for the next five years. The forecast years are currently 

calendar years 2005 to 2009, since no correcting adjustments have been made to those years’ 

liability transfers. This forecast was produced using the same methods that were used to 

produce the initial estimates of calendar year 1997 through 2004 liability, described in 

Chapter 1. The calendar year forecasts for 2005 and 2006 were produced using results from 

the 2001-based ITM described in that chapter while the 2007 through 2009 forecasts were 

produced using results from a comparable ITM based on 2004 SOI data and imputations. 

As noted in Chapter 2, tax returns alone do not provide sufficient data to estimate the 

revenue effects of the partial inclusion of Social Security and Railroad Social Security 

Equivalent benefits in AGI. Therefore, imputations of total Social Security and Railroad 

Social Security Equivalent benefits are added to both the 2001-based and 2004-based 

versions of the ITM to compensate for the missing data. In both cases, the total benefit 

amounts are distributed among appropriate recipients on the ITM using Form SSA-1099 and 

Form RRB-1099 information returns that are matched to the tax returns in the SOI files. In 

both versions, the most recent Current Population Survey data from the Census Bureau is 

used as a guide to the non-filing population. 

The cross-sectional records on both versions of the ITM are extrapolated to future 

years in accordance with the President’s macroeconomic forecast in use at the time of the 

extrapolation. As part of the extrapolation, total benefits are projected to grow at the rates 

indicated in the forecasts provided by the Social Security Administration and the Railroad 

Retirement Board. 

II. Forecast of Transfers to the Trust Funds 

The estimates of liability incurred in calendar years 2005 through 2009 and the 

amounts transferred to the trust funds are presented in Table 3. The transfers of estimated 

liability for 2005 through 2007 have been completed and include adjustments attributable to 

prior years’ liabilities. The FOASI, FDI, FHI, and SSEBA transfers for calendar year 2006 

liability include adjustments due to the reconciliation of calendar year 2001 estimated and 

actual liabilities. The FHI transfer for calendar year 2007 liability includes an adjustment due 

to the reconciliation of calendar year 2002 estimated and actual liability. The FOASI, FDI 

and SSEBA transfers for calendar year 2008 liability include adjustments due to the 

reconciliation of calendar year 2002 estimated and actual liability. The FOASI, FDI, FHI and 

SSEBA transfers for calendar year 2008 liability also include adjustments due the 

reconciliation of calendar year 2003 and calendar year 2004 estimated and actual liability. 

For the liability attributable to the partial inclusion of Social Security and Railroad 

Retirement benefits in AGI incurred in calendar years 2005 through 2009, OTA forecasts 

20 
 

that $87,390 million, $7,302 million, $60,650 million, and $696 million will be transferred 

from general revenues to the FOASI, FDI, FHI, and SSEBA trust funds. These transfers will 

be adjusted for prior periods’ liabilities. The adjustments will total -$3,096 for FOASI, -

$316 for FDI, -$811 for FHI, and -$28 for SSEBA. The net transfer to the trust funds is 

estimated to be $151,787 million. 

21 
Table 3
 

Forecast of Transfers, Net of Adjustments,
 

to the FOASI, FDI, FHI, and SSEBA Trust Funds
 

for Calendar Year Liability in 2005 to 2009
 

Calendar Year Liability in Millions of Dollars 

Trust Fund 

Completed Transfers Estimated Transfers Totals 

2005 2006 2007 2008 2009 2005-2009 

FOASI 

Estimated Transfer /1 13,698 15,437 17,047 18,564 22,644 87,390 

Prior Year Adjustment /2 0 48 0 -3,144 0 -3,096 

Net Transfer 13,698 15,485 17,047 15,420 22,644 84,294 

FDI 

Estimated Transfer /1 1,068 1,253 1,389 1,598 1,994 7,302 

Prior Year Adjustment /2 0 -27 0 -289 0 -316 

Net Transfer 1,068 1,226 1,389 1,309 1,994 6,986 

FHI 

Estimated Transfer /1 9,354 10,108 11,774 12,996 16,418 60,650 

Prior Year Adjustment /2 0 357 143 -1,311 0 -811 

Net Transfer 9,354 10,465 11,917 11,685 16,418 59,839 

SSEBA 

Estimated Transfer /1 117 125 135 144 175 696 

Prior Year Adjustment /2 0 6 0 -34 0 -28 

Net Transfer 117 131 135 110 175 668 

Totals 

Estimated Transfer /1 24,237 26,923 30,345 33,302 41,231 156,038 

Prior Year Adjustment /2 0 384 143 -4,778 0 -4,251 

Net Transfer 24,237 27,307 30,488 28,524 41,231 151,787 

Department of the Treasury 

Office of Tax Analysis 

Notes: 

1/ Estimated Transfers are amounts transfered to the trust funds for liability incurred in the year indicated. 

Note that the final two estimated liabilty transfers to the FHI trust fund for a given year actually occur in 

January and April of the following year. 

2/ Prior Year Adjustments are amount transferred to or from the trust funds that correct the original estimated 

liabilities transferred for prior years. Because the final two estimated liability transfers to the FHI trust fund 

for a given year occur in January and April of the following year, a Prior Year Adjustment to a given year's 

FHI estimated transfer may actually occur in the next year: 

Adjustments made to CY 2006 liability were for liability incurred in CY 2001. Adjustments to the FOASI, 

FDI and SSEBA trust funds were made in July. Adjustments to the FHI trust fund were made in June. 

Adjustments made to CY 2007 liability were for liability incurred in CY 2002. The adjustment to the FHI 

trust fund was made in January 2008. 

Adjustments made to CY 2008 liability were for liability incurred in CY 2002, CY 2003 and CY 2004. 

Adjustments to the FOASI, FDI and SSEBA trust funds were made in April (for CY 2002 liability), July 

(for CY 2003 liability) and October (for CY 2004 liability). Adjustments to the FHI trust fund were made 

in September 2008 (for CY 2003 liability) and January 2009 (for CY 2004 liability). 

22 
 

CHAPTER 4: DISTRIBUTION OF TAXABLE BENEFITS AND ANALYSIS 

OF PROVISIONAL INCOME SOURCES 

I. Distribution of Taxable Benefits by Provisional Income Class for 

Calendar Years 1997 Through 2004 

This section presents a distributional analysis of taxable Social Security and Railroad 

Social Security Equivalent benefits. The tabulations were made using the 1997 through 

2004 SOI samples and the tax calculators attached to each. Note that since the tables in this 

chapter are based on sample data, the statistics shown are subject to sampling error. In 

particular, the tax liabilities presented in 4.A through 4.H do not exactly match the 

population totals provided by the IRS and presented in the bottom sections of Tables 1.A 

through 1.H. (See the discussion in Chapter 3, Section II.) 

Tables 4.A through 4.H summarize the benefit inclusion rates and average marginal 

tax rates on benefits for families with taxable benefits by provisional income class for 

calendar years 1997 through 2004. Provisional income is AGI (excluding Social Security 

and Railroad Social Security Equivalent benefits included in AGI) plus tax exempt interest 

income plus one-half Social Security and Railroad Social Security Equivalent benefits. 

The tables show that, on average, families with taxable benefits included 58 percent 

of their benefits in AGI from 1997 through 2004. The tables also show how the benefit 

inclusion rates rise as provisional income rises. In each year, returns with provisional 

income of $30,000 or less include only about 14 percent of benefits in AGI while returns 

with provisional income of $75,000 or more include 85 percent of benefits in AGI. Since 

provisional income is somewhat correlated with the business cycle, benefit inclusion rates 

rise and fall over the period. Overall, the benefit inclusion rate peaked at 59 percent in 1999 

and 2000 and troughed at 56 percent in 2003. 

Tables 4.A through 4.H also show that the average marginal tax rate rises with 

provisional income. Returns with provisional income of $30,000 or less faced a tax rate on 

included benefits of 14 percent in 1997 while returns with provisional income over $200,000 

faced a tax rate of 35 percent. This pattern is apparent in all years. 

The tables also show that for each group, the average marginal tax rate fell over the 

period. The overall average effective marginal tax rate on taxable benefits hovered between 

22 percent and 24 for calendar years 1997 through 2002. In 2003, the overall average 

effective marginal tax rate dropped to 19 percent. 

23 
 

2004 

II. Comparison of Provisional Income Sources for Calendar Years 1995 to 

Table 5 provides some information about the levels and distributions of provisional 

income sources for taxpayers with taxable benefits in calendar years 1995 through 2004.9 

The table first shows the number of tax returns with Social Security and Railroad Social 

Security Equivalent benefits included in AGI, approximately 6.6 million in 1995. By 2004, 

about 11.7 million returns included benefits in AGI, an increase of about 77 percent. Recall 

from Chapter 1 that taxpayers are required to calculate provisional income and include a 

certain percentage of benefits in AGI if provisional income meets or exceeds certain 

thresholds. For all the tax returns in Table 5, provisional income was greater than or equal to 

the first threshold ($25,000 for single filers or $32,000 for joint filers).10 These thresholds 

are not indexed for inflation, thus the 77 percent rise in the number of returns with benefits 

included in AGI is due to both the increase in the size of the beneficiary population and 

increases in nominal income. 

The next column shows the total provisional income for all taxpayers with benefits 

included in AGI (in millions of dollars), as well as the mean and median provisional income 

(in dollars). In 1995, total provisional income for all taxpayers with taxable benefits was 

$449,992 million. Mean provisional income was $68,201, while the median was somewhat 

lower: $46,221. The relative levels of the mean and the median suggest that the lower half 

of the provisional income distribution is more closely bunched than the top half. That is, a 

relatively small number of taxpayers have extremely high levels of provisional income. By 

2004, total provisional income had risen 117 percent to $978,007 million while the mean had 

risen 23 percent to $83,649. The median rose 8 percent to $49,948. The growth in 

provisional income is not monotonic, but rather reflects the business cycle. Provisional 

income reached a peak of $886,695 million in 2000 before declining to $806,145 million in 

2002. Thereafter, provisional income rose to $978,007 in 2004. (In fact, the number of 

returns required to include benefits in AGI fell slightly from 2001 to 2002.) 

The next section of Table 5 provides information about the levels and distributions of 

certain sources of provisional income. These sources include Social Security and Railroad 

Social Security Equivalent benefits, pension income, taxable and tax exempt interest income, 

wages and salaries, net positive capital gains, dividends, and taxable IRA distributions. In 

addition to the total, mean and median amounts, the table shows the percent of returns 

reporting having the source, and the share the total amount of the source comprises of total 

provisional income. For example, in 1995, total pension income of $94,615 million 

comprised 21 percent of total provisional income and 71 percent of returns reported having 

pension income. The mean pension income was $14,340 while the median was $9,484. 

The table shows that pension income rose considerably during the 1995 to 2004 

period reaching $208,617 million, an increase of 120 percent. However, as a share of total 

provisional income, pensions remained constant. In 2004, pension income comprised 21 

percent of provisional income and 72 percent of returns reported having that source. The 

mean pension income had risen 25 percent, to $17,843, while the median had risen 34 

percent, to $12,564. Pension income is also less sensitive to the business cycle. In no year 

24 
did total or mean pension income show a decline, while the median dropped only 2 percent 

from 1995 to 1996. 

By definition, all these returns reported positive Social Security and Railroad Social 

Security Equivalent benefits. Recipients must include one-half of their benefits when 

determining provisional income and those “one-half” amounts are shown in Table 5. Like 

pension income, Social Security and Railroad Social Security Equivalent benefits remained 

constant as a share of provisional income. In 1995, total benefits included in provisional 

income were $40,544 million and comprised 9 percent of provisional income. The mean 

included amount was $6,145 while the median was $5,785. By 2004, one-half of Social 

Security and Railroad Equivalent Social Security benefits totaled $95,586 million (an 

increase of 136 percent), and comprised 10 percent of provisional income. The mean and 

median included amounts rose 33 percent and 35 percent to $8,175 and $7,816, respectively. 

In 1995, interest was comparable to pensions as a source of income for these 

taxpayers. Nearly all returns (96 percent) reported positive interest income, and the mean 

and aggregate total interest income (taxable plus tax exempt) were comparable to mean and 

aggregate pension income. In 1995, interest income totaled $85,494 million ($56,721 

million taxable and $28,773 million tax exempt), or 19 percent of provisional income. The 

mean interest income was $12,957, about 90 percent of the mean pension income in that 

year. Median interest income ($4,071) was significantly lower than the median pension 

income ($9,484), however. 

Over the next nine years, the importance of interest as an income source declined 

somewhat, at least in part due to declining interest rates.11 The mean and median levels of 

interest income fell to $7,186 and $571, respectively. The median, in particular, fell 86 

percent from its 1995 level. Moreover, interest income comprised only 9 percent of total 

provisional income in 2004. It should be noted however, that 87 percent of returns continued 

to report interest income, 15 percentage points more than those reporting pension income, 

and the most for any income source other than Social Security and its Railroad equivalent.12 

Wages are also an important source of income, but, compared to pension, benefit, and 

interest income, for relatively few taxpayers. Table 5 shows that in 1995, the mean level of 

wage income for taxpayers with taxable benefits was $12,855, almost $1,500 less than mean 

pension income and nearly equal to mean interest income. In total, these taxpayers had 

$84,818 million in wage income, comprising 19 percent of total provisional income. 

However, unlike pension and interest income, only 44 percent of taxpayers reported having 

wage income. The mean wage income remained essentially flat over the next four years and 

total wages as a share of provisional income actually declined to 16 percent by 1999. 

However, from 2000 to 2004, wages grew in importance. By 2004, the mean wage had 

grown to $18,123, wages comprised 22 percent of provisional income, and 48 percent of 

returns reported having wage income. 

Capital gains income was the most variable source of provisional income over the 

1995 to 2004 period. In 1995, mean capital gains income was $6,935 while the median 

capital gains income was zero. Total capital gains income was $45,759 million, or 10 

25 
percent of total provisional income. About 14 percent of returns offset positive ordinary 

income with negative capital gains income, and 53 percent of tax returns reported zero 

capital gains. The remaining 33 percent of returns reported positive capital gains income. 

The next five years saw an increase in total and mean capital gains income. By 2000, mean 

capital gains income had more than doubled to $14,927, and by that measure, was the third 

largest source of provisional income, behind pensions and wages. Total capital gains were 

$158,351 million, about 18 percent of total provisional income. Median capital gains were 

still zero however. About 36 percent of tax returns reported positive capital gains, about 12 

percent reported negative capital gains, and 52 percent of tax returns reported no capital 

gains. Interestingly, the percent of returns reporting positive capital gains reached a peak of 

48 percent three years earlier in 1997. After 2000, capital gains declined in total, mean, and 

share of total provisional income, hitting a trough in 2002. Total and mean capital gains fell 

52 percent over that span. The percent of taxpayers reporting positive capital gains hit a 

trough of 22 percent in 2003. From 2002 to 2004 total capital gains grew 98 percent to 

$150,563 million. However the median capital gain was still zero and only 26 percent of 

taxpayers reported having positive capital gains in AGI. 

Almost two-thirds of all taxpayers reported positive dividend income in each year 

from 1995 to 2000, although most reported relatively modest levels.13 In 1995, dividend 

income totaled $41,644 million, or 9 percent of provisional income. The median dividend 

income was $631. The mean dividend income was ten times that level ($6,312) indicating a 

small number of taxpayers with relatively high levels of dividend income. By 2000, 

aggregate dividend income had risen 57 percent, to $65,247 million, while the mean 

dividend income remained essentially constant. As a percent of provisional income, 

dividend income actually declined slightly to 7 percent. Like capital gains income, dividend 

income declined from 2000 to 2002, reaching a trough of $49,065 million. The mean 

dividend income had fallen to $4,584 and the median had fallen to $91. After 2002, 

dividend income began to rise. By 2004 total dividend income reached $64,815 million 

while mean dividend income reached $5,544. 

Finally, taxable IRA distributions form a small but increasing source of income for 

taxpayers with taxable Social Security and Railroad Equivalent Social Security benefits. In 

1995, taxable IRA distributions comprised only 4 percent of provisional income ($17,612 

million). The mean distribution was $2,669 and only 29 percent of taxpayers received such a 

distribution. Total and mean distributions increased steadily through 2000, reaching $56,673 

million and $5,342, respectively. Thirty-six percent of returns reported taxable IRA 

distributions. The total and mean distributions then declined through 2003, although the 

percent reporting a distribution remained constant. By 2004, however, total taxable IRA 

distributions rebounded to $61,235 million and the mean was $5,237. This provisional 

income source accounted for 6 percent of total provisional income, and 37 percent of 

taxpayers reported having the source. 

26 
 

 

Table 4.A
 

Distribution of Taxable Social Security and Railroad Social Security Equivalent Benefits and
 

Tax Liability Due to the Taxation of Benefits in Calendar Year 1997
 

By Provisional Income
 

Average 

Benefit Tax Liability Effective Marginal 

Total Benefits Inclusion Due to Inclusion Tax Rate on 

Provisional Income /1 Returns /2 Benefits /3 in AGI /3 Rate of Benefits /3 Benefits in AGI 

Under $30,000 822 7,841 1,201 15% 166 14% 

$30,000 to $40,000 2,154 26,213 6,194 24% 1,057 17% 

$40,000 to $50,000 1,589 20,102 10,394 52% 1,842 18% 

$50,000 to $60,000 1,020 13,206 10,288 78% 1,966 19% 

$60,000 to $75,000 1,000 13,613 11,399 84% 2,744 24% 

$75,000 to $100,000 712 9,643 8,199 85% 2,186 27% 

$100,000 to $200,000 713 11,048 9,392 85% 2,666 28% 

Over $200,000 300 5,285 4,493 85% 1,562 35% 

Total 8,308 106,951 61,558 58% 14,189 23% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for 1997. 

1/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits 

in AGI) plus one-half of Social Security and Railroad Social Security Equivalent benefits plus tax exempt interest. 

2/ Returns in thousands. Includes about 105,000 returns with married beneficiaries who do not file jointly. These 

taxpayers have provisional income thresholds of zero. Approximately 45,000 have provisional income below the 

minimum threshold applicable to other types of filers. 

3/ Benefit amounts and tax liability in millions of dollars. 

27 
 

 

Table 4.B
 

Distribution of Taxable Social Security and Railroad Social Security Equivalent Benefits and
 

Tax Liability Due to the Taxation of Benefits in Calendar Year 1998
 

By Provisional Income
 

Average 

Benefit Tax Liability Effective Marginal 

Total Benefits Inclusion Due to Inclusion Tax Rate on 

Provisional Income /1 Returns /2 Benefits /3 in AGI /3 Rate of Benefits /3 Benefits in AGI 

Under $30,000 851 8,358 1,195 14% 169 14% 

$30,000 to $40,000 2,354 29,674 7,034 24% 1,200 17% 

$40,000 to $50,000 1,694 22,902 11,587 51% 2,110 18% 

$50,000 to $60,000 1,043 13,637 10,749 79% 2,080 19% 

$60,000 to $75,000 1,056 14,695 12,469 85% 3,106 25% 

$75,000 to $100,000 803 11,538 9,908 86% 2,699 27% 

$100,000 to $200,000 795 12,316 10,575 86% 3,070 29% 

Over $200,000 345 6,038 5,185 86% 1,804 35% 

Total 8,941 119,159 68,703 58% 16,238 24% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for 1998. 

1/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits 

in AGI) plus one-half of Social Security and Railroad Social Security Equivalent benefits plus tax exempt interest. 

2/ Returns in thousands. Includes about 113,000 returns with married beneficiaries who do not file jointly. These 

taxpayers have provisional income thresholds of zero. Approximately 39,000 have provisional income below the 

minimum threshold applicable to other types of filers. 

3/ Benefit amounts and tax liability in millions of dollars. 

28 
 

 

Table 4.C
 

Distribution of Taxable Social Security and Railroad Social Security Equivalent Benefits and
 

Tax Liability Due to the Taxation of Benefits in Calendar Year 1999
 

By Provisional Income
 

Average 

Benefit Tax Liability Effective Marginal 

Total Benefits Inclusion Due to Inclusion Tax Rate on 

Provisional Income /1 Returns /2 Benefits /3 in AGI /3 Rate of Benefits /3 Benefits in AGI 

Under $30,000 844 8,515 1,193 14% 167 14% 

$30,000 to $40,000 2,386 30,446 7,338 24% 1,228 17% 

$40,000 to $50,000 1,766 24,254 12,304 51% 2,257 18% 

$50,000 to $60,000 1,137 15,010 11,804 79% 2,188 19% 

$60,000 to $75,000 1,116 15,612 13,202 85% 3,206 24% 

$75,000 to $100,000 933 13,483 11,460 85% 3,115 27% 

$100,000 to $200,000 887 13,941 11,850 85% 3,401 29% 

Over $200,000 392 6,974 5,928 85% 2,045 34% 

Total 9,459 128,235 75,079 59% 17,607 23% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for 1999. 

1/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits 

in AGI) plus one-half of Social Security and Railroad Social Security Equivalent benefits plus tax exempt interest. 

2/ Returns in thousands. Includes about 114,000 returns with married beneficiaries who do not file jointly. These 

taxpayers have provisional income thresholds of zero. Approximately 37,000 have provisional income below the 

minimum threshold applicable to other types of filers. 

3/ Benefit amounts and tax liability in millions of dollars. 

29 
 

 

Table 4.D
 

Distribution of Taxable Social Security and Railroad Social Security Equivalent Benefits and
 

Tax Liability Due to the Taxation of Benefits in Calendar Year 2000
 

By Provisional Income
 

Average 

Benefit Tax Liability Effective Marginal 

Total Benefits Inclusion Due to Inclusion Tax Rate on 

Provisional Income /1 Returns /2 Benefits /3 in AGI /3 Rate of Benefits /3 Benefits in AGI 

Under $30,000 883 9,254 1,263 14% 163 13% 

$30,000 to $40,000 2,566 33,963 8,121 24% 1,343 17% 

$40,000 to $50,000 1,952 27,181 13,814 51% 2,529 18% 

$50,000 to $60,000 1,318 19,162 14,464 75% 2,703 19% 

$60,000 to $75,000 1,291 19,071 16,063 84% 3,875 24% 

$75,000 to $100,000 1,040 15,876 13,494 85% 3,633 27% 

$100,000 to $200,000 1,088 17,861 15,182 85% 4,406 29% 

Over $200,000 472 8,898 7,563 85% 2,635 35% 

Total 10,609 151,267 89,964 59% 21,287 24% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for 2000. 

1/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits 

in AGI) plus one-half of Social Security and Railroad Social Security Equivalent benefits plus tax exempt interest. 

2/ Returns in thousands. Includes about 150,000 returns with married beneficiaries who do not file jointly. These 

taxpayers have provisional income thresholds of zero. Approximately 45,000 have provisional income below the 

minimum threshold applicable to other types of filers. 

3/ Benefit amounts and tax liability in millions of dollars. 

30 
 

 

Table 4.E
 

Distribution of Taxable Social Security and Railroad Social Security Equivalent Benefits and
 

Tax Liability Due to the Taxation of Benefits in Calendar Year 2001
 

By Provisional Income
 

Average 

Benefit Tax Liability Effective Marginal 

Total Benefits Inclusion Due to Inclusion Tax Rate on 

Provisional Income /1 Returns /2 Benefits /3 in AGI /3 Rate of Benefits /3 Benefits in AGI 

Under $30,000 943 9,944 1,412 14% 188 13% 

$30,000 to $40,000 2,641 36,613 8,575 23% 1,359 16% 

$40,000 to $50,000 2,083 30,350 15,284 50% 2,770 18% 

$50,000 to $60,000 1,437 21,664 16,399 76% 2,940 18% 

$60,000 to $75,000 1,231 18,574 15,567 84% 3,560 23% 

$75,000 to $100,000 1,082 17,475 14,754 84% 3,901 26% 

$100,000 to $200,000 953 17,217 14,579 85% 4,178 29% 

Over $200,000 409 8,258 6,989 85% 2,427 35% 

Total 10,779 160,097 93,559 58% 21,323 23% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for 2001. 

1/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits 

in AGI) plus one-half of Social Security and Railroad Social Security Equivalent benefits plus tax exempt interest. 

2/ Returns in thousands. Includes about 137,000 returns with married beneficiaries who do not file jointly. These 

taxpayers have provisional income thresholds of zero. Approximately 46,000 have provisional income below the 

minimum threshold applicable to other types of filers. 

3/ Benefit amounts and tax liability in millions of dollars. 

31 
 

 

Table 4.F
 

Distribution of Taxable Social Security and Railroad Social Security Equivalent Benefits and
 

Tax Liability Due to the Taxation of Benefits in Calendar Year 2002
 

By Provisional Income
 

Average 

Benefit Tax Liability Effective Marginal 

Total Benefits Inclusion Due to Inclusion Tax Rate on 

Provisional Income /1 Returns /2 Benefits /3 in AGI /3 Rate of Benefits /3 Benefits in AGI 

Under $30,000 944 10,523 1,456 14% 172 12% 

$30,000 to $40,000 2,764 40,262 8,664 22% 1,239 14% 

$40,000 to $50,000 1,996 30,453 14,764 48% 2,557 17% 

$50,000 to $60,000 1,341 21,028 15,378 73% 2,614 17% 

$60,000 to $75,000 1,247 19,797 16,698 84% 3,523 21% 

$75,000 to $100,000 1,057 16,982 14,444 85% 3,656 25% 

$100,000 to $200,000 977 18,145 15,444 85% 4,263 28% 

Over $200,000 377 7,769 6,612 85% 2,236 34% 

Total 10,703 164,961 93,459 57% 20,261 22% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for 2002. 

1/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits 

in AGI) plus one-half of Social Security and Railroad Social Security Equivalent benefits plus tax exempt interest. 

2/ Returns in thousands. Includes about 144,000 returns with married beneficiaries who do not file jointly. These 

taxpayers have provisional income thresholds of zero. Approximately 54,000 have provisional income below the 

minimum threshold applicable to other types of filers. 

3/ Benefit amounts and tax liability in millions of dollars. 

32 
 

 

Table 4.G
 

Distribution of Taxable Social Security and Railroad Social Security Equivalent Benefits and
 

Tax Liability Due to the Taxation of Benefits in Calendar Year 2003
 

By Provisional Income
 

Average 

Benefit Tax Liability Effective Marginal 

Total Benefits Inclusion Due to Inclusion Tax Rate on 

Provisional Income /1 Returns /2 Benefits /3 in AGI /3 Rate of Benefits /3 Benefits in AGI 

Under $30,000 942 10,865 1,585 15% 177 11% 

$30,000 to $40,000 2,659 40,034 8,431 21% 1,136 13% 

$40,000 to $50,000 2,210 34,300 15,872 46% 2,562 16% 

$50,000 to $60,000 1,375 21,699 15,820 73% 2,595 16% 

$60,000 to $75,000 1,214 19,785 16,560 84% 2,773 17% 

$75,000 to $100,000 1,174 19,460 16,475 85% 3,512 21% 

$100,000 to $200,000 1,013 18,854 15,992 85% 4,035 25% 

Over $200,000 389 8,316 7,032 85% 2,201 31% 

Total 10,975 173,314 97,768 56% 18,992 19% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for 2003. 

1/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits 

in AGI) plus one-half of Social Security and Railroad Social Security Equivalent benefits plus tax exempt interest. 

2/ Returns in thousands. Includes about 165,000 returns with married beneficiaries who do not file jointly. These 

taxpayers have provisional income thresholds of zero. Approximately 70,000 have provisional income below the 

minimum threshold applicable to other types of filers. 

3/ Benefit amounts and tax liability in millions of dollars. 

33 
 

 

Table 4.H
 

Distribution of Taxable Social Security and Railroad Social Security Equivalent Benefits and
 

Tax Liability Due to the Taxation of Benefits in Calendar Year 2004
 

By Provisional Income
 

Average 

Benefit Tax Liability Effective Marginal 

Total Benefits Inclusion Due to Inclusion Tax Rate on 

Provisional Income /1 Returns /2 Benefits /3 in AGI /3 Rate of Benefits /3 Benefits in AGI 

Under $30,000 990 11,630 1,955 17% 221 11% 

$30,000 to $40,000 2,783 42,732 9,064 21% 1,219 13% 

$40,000 to $50,000 2,149 35,070 16,244 46% 2,614 16% 

$50,000 to $60,000 1,525 24,581 17,824 73% 2,998 17% 

$60,000 to $75,000 1,411 24,286 20,249 83% 3,333 16% 

$75,000 to $100,000 1,178 20,679 17,608 85% 3,757 21% 

$100,000 to $200,000 1,166 21,742 18,585 85% 4,773 26% 

Over $200,000 490 10,452 8,934 85% 2,817 32% 

Total 11,692 191,172 110,462 58% 21,733 20% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for 2004. 

1/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits 

in AGI) plus one-half of Social Security and Railroad Social Security Equivalent benefits plus tax exempt interest. 

2/ Returns in thousands. Includes about 168,000 returns with married beneficiaries who do not file jointly. These 

taxpayers have provisional income thresholds of zero. Approximately 68,000 have provisional income below the 

minimum threshold applicable to other types of filers. 

3/ Benefit amounts and tax liability in millions of dollars. 

34 
 

Table 5
 

Distributional Analysis of Income Sources of Returns with
 

Taxable Social Security and Railroad Social Security Equivalent Benefits - 1995 to 2004
 

Provisional Income Source 

Provisional Social Interest Income 

Year Returns /1 Statistic /2 Income /3 Security /4 Pensions Taxable Tax Exempt Total 

1995 6,598 Total 449,992 40,544 94,615 56,721 28,773 85,494 

Mean 68,201 6,145 14,340 8,597 4,361 12,957 

Median 46,221 5,785 9,484 2,779 0 4,071 

Percent Positive 100% 71% 96% 29% 96% 

Share of Provisional Income 9% 21% 13% 6% 19% 

1996 7,366 Total 527,261 46,357 107,386 64,799 28,915 93,714 

Mean 71,581 6,293 14,579 8,797 3,925 12,723 

Median 46,433 5,930 9,298 2,886 0 3,948 

Percent Positive 100% 71% 95% 28% 95% 

Share of Provisional Income 9% 20% 12% 5% 18% 

1997 

1998 

8,308 

8,941 

Total 

Mean 

Median 

Percent with Source 

Share of Provisional In

Total 

Mean 

Median 

Percent with Source 

Share of Provisional In

612,968 

73,781 

46,999 

come 

686,482 

76,778 

47,392 

come 

53,475 

6,437 

6,047 

100% 

9% 

59,579 

6,663 

6,275 

100% 

9% 

123,259 

14,836 

9,551 

72% 

20% 

135,909 

15,200 

10,081 

72% 

20% 

69,768 

8,398 

2,636 

95% 

11% 

74,335 

8,314 

2,427 

95% 

11% 

29,707 

3,576 

0 

25% 

5% 

30,004 

3,356 

0 

23% 

4% 

99,475 

11,973 

3,478 

95% 

16% 

104,338 

11,669 

3,352 

95% 

15% 

1999 

2000 

9,459 

10,609 

Total 

Mean 

Median 

Percent with Source 

Share of Provisional In

Total 

Mean 

Median 

Percent with Source 

Share of Provisional In

744,295 

78,685 

48,178 

come 

886,695 

83,583 

49,328 

come 

64,118 

6,778 

6,429 

100% 

9% 

75,633 

7,129 

6,783 

100% 

9% 

148,761 

15,727 

10,640 

73% 

20% 

169,105 

15,940 

10,854 

72% 

19% 

73,245 

7,743 

2,038 

94% 

10% 

87,076 

8,208 

2,032 

94% 

10% 

30,184 

3,191 

0 

22% 

4% 

31,007 

2,923 

0 

20% 

3% 

103,429 

10,934 

2,851 

94% 

14% 

118,082 

11,131 

2,622 

94% 

13% 

2001 10,779 Total 

Mean 

Median 

Percent with Source 

Share of Provisional In

838,846 

77,820 

48,739 

come 

80,048 

7,426 

7,116 

100% 

10% 

176,129 

16,340 

11,179 

72% 

21% 

87,673 

8,133 

1,864 

93% 

10% 

32,646 

3,029 

0 

19% 

4% 

120,319 

11,162 

2,418 

93% 

14% 

2002 10,703 Total 

Mean 

Median 

Percent with Source 

Share of Provisional In

806,145 

75,323 

48,025 

come 

82,480 

7,707 

7,362 

100% 

10% 

184,503 

17,239 

12,207 

72% 

23% 

66,047 

6,171 

954 

90% 

8% 

32,111 

3,000 

0 

19% 

4% 

98,158 

9,171 

1,227 

91% 

12% 

2003 10,975 Total 

Mean 

Median 

Percent with Source 

Share of Provisional In

844,190 

76,919 

48,010 

come 

86,657 

7,896 

7,606 

100% 

10% 

193,725 

17,651 

12,649 

72% 

23% 

54,013 

4,921 

602 

88% 

6% 

31,478 

2,868 

0 

18% 

4% 

85,491 

7,790 

769 

88% 

10% 

2004 11,692 Total 

Mean 

Median 

Percent with Source 

Share of Provisional In

978,007 

83,649 

49,948 

come 

95,586 

8,175 

7,816 

100% 

10% 

208,617 

17,843 

12,564 

72% 

21% 

53,697 

4,593 

454 

86% 

5% 

30,318 

2,593 

0 

17% 

3% 

84,015 

7,186 

571 

87% 

9% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for tax years 1997 to 2004. 

1/ Returns with Social Security and Railroad Social Security Equivalent benefits included in AGI, in thousands. 

2/ Totals are in millions of dollars. Means and medians are in dollars. Percent positive is the percent of returns with a positive value for the income 

source indicated. Net capital gains may be negative. All other income sources must be zero or positive. Share of Provisional Income is the percent 

of total provisional income attributable to the income source in the given year. 

3/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits in AGI) plus one-half of Social 

Security and Railroad Social Security Equivalent benefits plus tax exempt interest. Provisional income totals may not equal the sums over the 

provisional income components due to other sources of income and adjustments made in calculating AGI. (Equivalently, shares of provisional 

income may not add to 100). Other sources of income include (but are not limited to) partnership and other Schedule E income, while adjustments 

include (but are not limited to) the deduction for Self-Employment tax paid. 

4/ Column shows one-half Social Security and Railroad Social Security Equivalent benefits since that amount is included in provisional income. 

35 
 

 

 

 

Table 5 (continued)
 

Distributional Analysis of Income Sources of Returns with
 

Taxable Social Security and Railroad Social Security Equivalent Benefits - 1995 to 2004
 

Provisional Income Source 

Year Returns /1 Statistic /2 

Provisional 

Income /3 

Wages and 

Salaries 

Net Capital 

Gains Dividends 

Taxable IRA 

Distributions 

1995 6,598 Total 

Mean 

Median 

Percent Positive 

Share of Provisional 

449,992 

68,201 

46,221 

Income 

84,818 

12,855 

0 

44% 

19% 

45,759 

6,935 

0 

33% 

10% 

41,644 

6,312 

631 

64% 

9% 

17,612 

2,669 

0 

29% 

4% 

1996 7,366 Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

527,261 

71,581 

46,433 

96,615 

13,116 

0 

43% 

18% 

67,366 

9,146 

0 

37% 

13% 

46,624 

6,330 

627 

64% 

9% 

23,042 

3,128 

0 

31% 

4% 

1997 8,308 Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

612,968 

73,781 

46,999 

107,020 

12,882 

0 

43% 

17% 

96,822 

11,654 

0 

48% 

16% 

53,851 

6,482 

704 

65% 

9% 

30,525 

3,674 

0 

33% 

5% 

1998 8,941 Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

686,482 

76,778 

47,392 

114,706 

12,829 

0 

42% 

17% 

124,321 

13,904 

0 

47% 

18% 

55,172 

6,171 

559 

65% 

8% 

37,997 

4,250 

0 

33% 

6% 

1999 9,459 Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

744,295 

78,685 

48,178 

122,676 

12,969 

0 

43% 

16% 

134,640 

14,234 

0 

39% 

18% 

59,821 

6,324 

578 

64% 

8% 

47,640 

5,036 

0 

35% 

6% 

2000 10,609 Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

886,695 

83,583 

49,328 

162,724 

15,339 

0 

44% 

18% 

158,351 

14,927 

0 

36% 

18% 

65,247 

6,150 

449 

64% 

7% 

56,673 

5,342 

0 

36% 

6% 

2001 10,779 Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

838,846 

77,820 

48,739 

176,910 

16,412 

0 

46% 

21% 

94,489 

8,766 

0 

29% 

11% 

55,257 

5,126 

181 

62% 

7% 

54,378 

5,045 

0 

36% 

6% 

2002 

2003 

10,703 

10,975 

Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

806,145 

75,323 

48,025 

844,190 

76,919 

48,010 

181,343 

16,944 

0 

47% 

22% 

195,705 

17,832 

0 

48% 

23% 

76,155 

7,116 

0 

24% 

9% 

91,441 

8,332 

0 

22% 

11% 

49,065 

4,584 

91 

61% 

6% 

52,956 

4,825 

60 

59% 

6% 

51,636 

4,825 

0 

36% 

6% 

50,555 

4,606 

0 

36% 

6% 

2004 11,692 Total 

Mean 

Median 

Percent Positive 

Share of Provisional Income 

978,007 

83,649 

49,948 

211,892 

18,123 

0 

48% 

22% 

150,563 

12,878 

0 

26% 

15% 

64,815 

5,544 

73 

59% 

7% 

61,235 

5,237 

0 

37% 

6% 

Department of the Treasury 

Office of Tax Analysis 

Source: SOI Individual Tax Return Sample Data for tax years 1997 to 2004. 

1/ Returns with Social Security and Railroad Social Security Equivalent benefits included in AGI, in thousands. 

2/ Totals are in millions of dollars. Means and medians are in dollars. Percent positive is the percent of returns with a positive value for the income 

source indicated. Net capital gains may be negative. All other income sources must be zero or positive. Share of Provisional Income is the percent 

of total provisional income attributable to the income source in the given year. 

3/ Provisional income is calculated as AGI (excluding Social Security and Railroad Social Security Equivalent benefits in AGI) plus one-half of Social 

Security and Railroad Social Security Equivalent benefits plus tax exempt interest. Provisional income totals may not equal the sums over the 

provisional income components due to other sources of income and adjustments made in calculating AGI. (Equivalently, shares of provisional 

income may not add to 100). Other sources of income include (but are not limited to) partnership and other Schedule E income, while adjustments 

include (but are not limited to) the deduction for Self-Employment tax paid. 

4/ Column shows one-half Social Security and Railroad Social Security Equivalent benefits since that amount is included in provisional income. 

36 
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Cilke, James C. “The Treasury Individual Income Tax Simulation Model.” mimeo. 

Department of the Treasury. Office of Tax Analysis. April 1994. 

Social Security Administration. 2002 Annual Statistical Supplement to the Social Security 

Bulletin. Washington, D.C.: Government Printing Office, December 2002. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Year 1984. March 1987. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Year 1985. August 1987. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Year 1986. February 1989. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Years 1987 and 1988. March 

1991. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Year 1989. March 1992. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Year 1990. January 1993. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Year 1991. September 1994. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Year 1992. January 1997. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Year 1993. July 1998. 

U.S. Department of the Treasury. Office of Tax Analysis. Report on the Taxation of Social 

Security and Railroad Retirement Benefits in Calendar Years 1994, 1995, and 1996. 

January 2001. 

37 
 

ENDNOTES 

1. This report covers an eight year period due to various delays in determining final tax liability 

and in the production of the report. These delays prevented the timely publication of reports 

covering tax years 1997 through 2001. Shortly after the completion of the 2001 report, final 

tax liability information for tax years 2002 through 2004 became available and final 

correcting adjustments were made. Therefore, rather than issue one report for 1997 through 

2001, and separate reports for 2002, 2003 and 2004, the analyses for 2002, 2003 and 2004 

were added to the 1997 to 2001 report. 

2. For single filers, $4,500 represents one-half of the difference between the first and second 

provisional income thresholds ($25,000 and $34,000). For joint filers, $6,000 represents 

one-half of the difference between the first and second provisional income thresholds 

($32,000 and $44,000). The second provisional thresholds and the associated benefits-inAGI inclusion rule were enacted as part of OBRA 93 and apply to all tax years beginning on 

or after January 1, 1994. OBRA 93 also stipulated that the additional tax liability arising 

from those provisions be directed to the FHI trust fund. 

3. Liability estimates and the associated transfers are updated semi-annually (in December and 

May) to conform with updates to the President’s macroeconomic forecast. All transfers are 

made using the most recently created forecast. 

4. In May 2000, the IRS provided OTA with preliminary totals of tax liability with and without 

the inclusion of Social Security benefits for calendar year 1997. The July and September 

2000 correcting adjustments were made based on these totals. In February 2001, the IRS 

provided OTA with revised totals for calendar year 1997. The second correcting 

adjustments made in September and October 2001 were based on these totals. 

5. A detailed description of the Individual Income Tax Model can be found in Cilke (1994). 

6. OTA does not estimate the liability attributable to the receipt of FOASI and FDI benefits by 

non-resident aliens. Prior to tax year 1995, one-half of any Social Security benefit received 

by a non-resident alien was subject to a 30 percent tax rate, and this amount was 

automatically withheld by the Social Security Administration. For tax years 1995 and after, 

the percent of benefits subject to withholding is raised to 85 percent (P.L. 103-465). 

Each month, the Social Security Administration sends a certification of the amount withheld 

to the Treasury Department's Financial Management Service. The withheld amount is 

transferred to general revenues and then back to the FOASI and FDI trust funds. Since the 

Social Security Administration has information on the actual amounts withheld, OTA does 

not estimate these withheld amounts. 

Similarly, the Railroad Retirement Board automatically withholds taxes on Railroad Social 

Security Equivalent benefits received by non-resident aliens. However, a different procedure 

is used to transfer these amounts to the SSEBA. OTA includes an estimate of the withheld 

amounts in its initial estimates of transfers to the trust funds and subsequently verifies these 

estimates with the Railroad Retirement Board. 

38 
 

The tables in this report do not include FOASI or FDI benefits received by non-resident 

aliens or the taxes attributable to these benefits. However, the tables do show the Railroad 

Social Security Equivalent benefits received by non-resident aliens. 

7. For example, as AGI increases, a lesser amount of medical, casualty and certain 

miscellaneous expenses may be deducted. On the other hand, the increased tax liability 

resulting from the inclusion of benefits in AGI enables some taxpayers to use tax credits that 

otherwise might not be usable in that year. 

8. The Form SSA-1099 records provided to the IRS distinguish between retirement and 

disability benefits, even though the Form SSA-1099s sent to taxpayers do not include this 

information. 

9. The statistics shown in Table 5 are calculated from the 1995 through 2004 SOI files. 

10. A small percentage of taxpayers file as “married, filing separately.” These taxpayers have 

no thresholds and are always required to include Social Security and Railroad Social 

Security Equivalent benefits in AGI. They are included in Table 5. 

11. The yield on a 10-year Treasury note declined from 6.58 percent in 1995 to 5.26 percent in 

1998, before rising to 6.03 percent in 2000. The rate declined thereafter, to 4.02 percent in 

2003 and 4.27 in 2004. Similarly, Moody’s Aaa Corporate Bond yield declined from 7.59 

percent in 1995 to 6.53 percent in 1998, before rising to 7.62 percent in 2000. It then 

declined to 5.63 in 2004. 

12. While taxable and tax exempt interest are both important sources of provisional income, 

taxable interest comprises the major share of this income source. Only 29 percent of 

taxpayers reported positive tax exempt interest in 1995, and only 17 percent in 2004. In 

1995, taxable interest income comprised 66 percent of total interest income. By 2000, its 

share had risen to 74 percent. By 2004, its share had declined to 64 percent. 

13. Dividend income includes dividends paid by taxable corporations, distributions from mutual 

funds and bond funds, and other sources. 

39