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
Your provisional income and your tax filing status decide whether, and how much, your Social Security benefits are taxed:
| 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% |
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