Social Security benefits were initially exempt from federal income tax, but in 1983, they became partially taxable. In 1993, a second income threshold was added that increased the share of benefits subject to taxation. Today, some recipients of Social Security can collect all of their benefits tax-free. Others, however, are required to pay taxes on their Social Security benefits, and this is where provisional income comes into play.
Provisional income is a measure used by the IRS to determine whether or not recipients of Social Security are required to pay taxes on their benefits. Provisional income is calculated by adding up a recipient's gross income, tax-free interest, and 50% of Social Security benefits.
Three steps for calculating provisional income
- Start with your gross income, which is the total amount of money you make, not including your Social Security benefits. You can find this amount on your tax return.
Add any tax-free interest you received, such as interest from a municipal bond, which is always tax-exempt at the federal level.
- Calculate 50% of your Social Security benefit and add that amount to your previous total.
Let's say your gross income is $20,000, and you earned $2,000 in municipal bond interest. Add those amounts together to arrive at $22,000. Now, let's assume you receive $24,000 in Social Security benefits. Divide that in half to arrive at $12,000. Add $22,000 and $12,000, and your provisional income is $34,000.
How provisional income affects taxation
TAX FILING STATUS | PROVISIONAL INCOME | SOCIAL SECURITY TAXATION |
|---|---|---|
Single or head of household | Less than $25,000 | 0% |
$25,000 - $34,000 | Up to 50% | |
More than $34,000 | Up to 85% | |
Joint filers | Less than $32,000 | 0% |
$32,000 - $44,000 | Up to 50% | |
More than $44,000 | Up to 85% |
One more way to add to your income in retirement, of course, is to own stocks. For that, you'll need a brokerage account, if you don't already have one. We encourage you to check out our brokerage section, where you can learn about various choices and figure out which one is the best for your investing needs.
