Income and Assets · Retirement income

Taxability of Social Security and Railroad Retirement benefits

Two features of IRC § 86 do most of the work. The first is that the amount pulled into income depends on income the taxpayer may not think of as income — tax-exempt interest is added back, and half the benefits themselves count toward the test that decides how much of the benefits are taxed. The second is that the thresholds have never been indexed. They are the same figures Congress wrote in 1983 and 1993, so each year of ordinary inflation moves more retirees across them.

The rule

Benefits are includible on a formula, notwithstanding the Social Security Act. Gross income includes social security benefits in an amount equal to the lesser of one-half of the benefits received during the year or one-half of the excess described in § 86(b)(1) — expressly notwithstanding section 207 of the Social Security Act, which would otherwise make benefits non-assignable and untaxable (IRC § 86(a)(1)).

The test is a sum, and it is not adjusted gross income. A taxpayer is within the section if modified adjusted gross income plus one-half of the benefits received exceeds the base amount (IRC § 86(b)(1)(A), (B)). Modified adjusted gross income is AGI determined without regard to § 86 itself and without §§ 85(c), 135, 137, 221, 911, 931 and 933, increased by tax-exempt interest (§ 86(b)(2)(A), (B)). Municipal bond interest that is excluded from gross income for every other purpose is counted here.

The second tier. Where the sum exceeds the adjusted base amount, the amount included is the lesser of (i) 85 percent of that excess plus the lesser of the first-tier amount or one-half the difference between the adjusted base amount and the base amount, or (ii) 85 percent of the benefits received (IRC § 86(a)(2)(A), (B)). Clause (B) is the ceiling: no more than 85 percent of benefits is ever includible under this section, however large the taxpayer’s other income.

Three base amounts, and one of them is zero. The base amount differs by filing status, and it is zero for a taxpayer who is married at the close of the year within § 7703, does not file jointly, and does not live apart from their spouse at all times during the year (IRC § 86(c)(1)). The adjusted base amount follows the same pattern at higher figures (§ 86(c)(2)); both sets are in the table below. None of the six figures carries an inflation adjustment.

What counts as a benefit. A social security benefit means any amount received by reason of entitlement to a monthly benefit under title II of the Social Security Act or to a tier 1 railroad retirement benefit (IRC § 86(d)(1)). Tier 1 is defined as the portion of the Railroad Retirement Act annuity equal to what the employee would have received under the Social Security Act had the railroad service been covered employment, plus the § 3(f)(3) amount (§ 86(d)(4)). Tier 2 is not in the definition and is taxed as a pension instead — which is why the Railroad Retirement Board issues two different statements.

Repayments net against receipts. Benefits received during the year are reduced by any repayment made during that year of a benefit previously received, whether or not the repaid benefit was received in that year (IRC § 86(d)(2)(A)). Where the repayments exceed the year’s receipts, the excess is deductible under § 165 only to that extent (§ 86(d)(2)(B)).

Workmen’s compensation offsets are still benefits. Where a benefit is reduced because of a workmen’s compensation award, the portion of the compensation equal to that reduction is treated as a social security benefit for this purpose (IRC § 86(d)(3)) — so the substitution does not convert taxable benefits into tax-free compensation.

The lump-sum election. Where part of a lump-sum payment received this year is attributable to prior years, the taxpayer may elect to cap the amount included by reason of that portion at the sum of the increases in gross income that would have resulted from taking it into account in the years to which it is attributable (IRC § 86(e)(1)). This is a limitation on the current year’s inclusion, not an amendment of the earlier returns.

Nonresident aliens are outside the formula entirely. For a nonresident alien, 85 percent of any social security benefit is included in gross income and § 86 does not apply (IRC § 871(a)(3)(A), (B)). There is no base amount and no computation.

Benefits are treated as a pension for four other provisions — the § 22(c)(3)(A) reduction in the credit for the elderly, the § 32(c)(2) definition of earned income, the § 219(f)(1) definition of compensation, and the § 911(b)(1) definition of foreign earned income (IRC § 86(f)). Benefits are therefore not compensation that can support an IRA contribution.

Current figures

How it works in practice

Build the sum first, and build it from the return rather than from the client’s description of their income. Take adjusted gross income, strip out anything excluded by the seven sections listed in § 86(b)(2)(A), add back every dollar of tax-exempt interest, then add half the benefits from the payer’s statement. Compare that figure to the base amount, then to the adjusted base amount, and apply whichever tier the taxpayer has reached.

The result is a marginal rate problem, not a threshold problem. In the range between the two amounts, an extra dollar of ordinary income pulls fifty cents of benefits into income; above the adjusted base amount it pulls eighty-five cents, until the 85 percent ceiling in § 86(a)(2)(B) is reached. A retiree in that range faces a marginal rate substantially higher than their bracket, and it is the single most useful thing to be able to explain to them.

Two planning consequences follow directly. Tax-exempt interest does not help — § 86(b)(2)(B) adds it back, so a municipal bond can increase the tax on benefits while producing no taxable interest of its own. And a Roth distribution does help, because a qualified distribution is not in gross income at all and therefore not in adjusted gross income, while an equivalent traditional IRA distribution enters the sum in full.

How this has changed

The formula has not changed since 1993; its reach has. The first tier and the base amounts date from 1983; the second tier and the adjusted base amounts from 1993. Neither set carries an inflation adjustment, and the statute contains no cost-of-living clause for them. The practical effect is a rule that was written to reach a minority of recipients and now reaches a large share of them without any amendment at all — an unusual case where the currency check turns up no change in the text and a large change in the outcome.

A senior deduction arrived in 2025 and does not touch this section. Pub. L. 119-21 § 70103(a) added IRC § 151(d)(5)(C): a deduction for each taxpayer, and each spouse on a joint return, who has attained age 65 before the close of the year, for taxable years beginning before 1 January 2029, phased down above a modified adjusted gross income threshold, requiring a social security number and, for a married taxpayer, a joint return. It is allowed under § 151 in computing taxable income (IRC § 151(a)) and is subtracted from adjusted gross income by § 63(b)(2). Because it operates below the line, it is not in the adjusted gross income that § 86(b)(2) starts from, and it cannot reduce the amount of benefits pulled into gross income. Descriptions of it as ending the taxation of social security are describing an effect on the tax, at some income levels, and not an effect on this computation — and it expires after 2028.

The list in § 86(b)(2)(A) has drifted. It still names § 85(c), the unemployment compensation exclusion available only for 2020, and it no longer names the repealed tuition deduction. Reading the list as a current inventory of exclusions rather than as a fixed cross-reference produces errors in both directions.

Exam focus

Expect the sum to be built for you incorrectly. The tested step is almost always the tax-exempt interest add-back in § 86(b)(2)(B) or the use of one-half rather than all of the benefits.

Expect the zero base amount for a married taxpayer filing separately who lived with their spouse at any point. It converts a fact pattern that looks like it produces no inclusion into one that produces the 85 percent maximum.

Expect the ceiling as a distractor set of four percentages. The answer is the § 86(a)(2)(B) figure, and the one-half in § 86(a)(1) is the first tier, not a maximum.

Watch for tier 2 railroad retirement, for a nonresident alien — where § 871(a)(3) replaces the whole computation — and for a lump sum that invites the § 86(e) election.

Check yourself

1. A single taxpayer has adjusted gross income of 20,000 dollars, tax-exempt interest of 3,000 dollars and social security benefits of 14,000 dollars. Is any benefit taxable?

Answer: Yes. The sum under IRC § 86(b)(1)(A) is 20,000 plus 3,000 added back by § 86(b)(2)(B) plus 7,000 — half the benefits — for 30,000 dollars, which exceeds the single base amount but not the single adjusted base amount, so the first tier of § 86(a)(1) applies.

2. What is the largest proportion of benefits that IRC § 86 can include, and where is it stated?

Answer: 85 percent, in § 86(a)(2)(B), which caps the second-tier amount at 85 percent of the benefits received. The first tier’s one-half is not a maximum but the whole of the lower computation.

3. A married taxpayer filing separately lived with their spouse for one month in 2026. What base amount applies?

Answer: Zero. IRC § 86(c)(1)(C) requires the taxpayer to live apart from their spouse at all times during the taxable year to escape the zero base amount, and § 86(c)(2)(C) gives the same result for the adjusted base amount.

4. Does a qualified Roth IRA distribution affect the amount of benefits included in income?

Answer: No. A qualified distribution is not includible in gross income under IRC § 408A(d)(1), so it is not in adjusted gross income and does not enter the sum in § 86(b)(1)(A). A traditional IRA distribution of the same size does enter it in full.

5. A client aged 68 asks whether the deduction for seniors means their benefits are no longer taxable. What is the answer?

Answer: No. The IRC § 151(d)(5)(C) deduction is allowed in computing taxable income under § 151(a) and subtracted from adjusted gross income under § 63(b)(2), so it sits below the line and outside the modified adjusted gross income that drives § 86. It may reduce their tax; it does not reduce the amount of benefits included in gross income.