In 1938, the Treasury Department ruled to exclude Social Security benefits from federal income taxes, but in 1983, Congress passed amendments that allowed taxation of 50 percent of Social Security benefits if taxpayers' income passed a certain threshold, reports the Social Security Administration. In 1993, Congress modified the law to allow taxation of up to 85 percent of Social Security benefits for those whose incomes passed a second, higher threshold.
The Treasury Department initially decided to treat Social Security benefits differently than retirement funds that private pensions paid out because it considered the benefits to be gratuities, and gifts were not taxable, explains the Social Security Administration. The 1979 Advisory Council decided that the gratuity model was incorrect and suggested adoption of the taxation policy of private pension plans for Social Security. Resistance to the proposal in Congress led to the compromise of imposing income thresholds for taxation of benefits. The 1983 amendments that initiated taxation of Social Security benefits stipulated that the tax funds would not go into the general treasury but into the trust funds that financed the Social Security program.
People filing as individuals with combined incomes between $25,000 and $34,000 and couples filing jointly with incomes between $32,000 and $44,000 must pay income taxes on 50 percent of their Social Security benefits as of 2015, according to the Social Security Administration. If they have incomes above these amounts, they pay taxes on a higher percentage of their benefits, but the maximum amount for federal income tax on Social Security benefits remains 85 percent.