What Is Provisional Income?

Lidia Staron, author at OpenLoans
Lidia Staron   Head of Content
Personal Finance
I enjoy navigating people through important financial decisions.

Over 60 million Americans currently receive some income from Social Security.

Social Security income is taxable, but only sometimes. Social Security income becomes taxable based on your provisional income.

Provisional income acts as an IRS threshold to determine whether a portion of your Social Security income will be taxed. If you’re looking to save money on taxes or better understand how Social Security taxes work, we’re here to help you.

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How Does Provisional Income Work?

Provisional income is a threshold set by the IRS, and Social Security benefits are taxed if they exceed the set amount.

Provisional income calculations can get a bit complex, though it is all laid out in §86 of the Internal Revenue Code (IRC). Several factors are assessed when calculating provisional income levels.

  • Gross income
  • Tax-free interest
  • Half the recipient’s Social Security income

Understanding Provisional Income

Retiree calculating taxes.

Provisional income is dependent on the established base amount. For instance, if you are a single taxpayer and your provisional income is between $25,000 and $34,000, you will pay tax on either 50% of all of your Social Security income or 50% of the difference between the provisional and base income.

If the income exceeds $34,000, then the taxable increases to 85%. However, your Social Security income will not be taxed if your provisional income is less than $25,000.

For example, if a retiree makes $22,000 a year from stocks and receives $10,000 a year in Social Security benefits, their provisional income will amount to $30,000. As a result, their Social Security income will be taxed at 50%.

Keep in mind, the percentages and thresholds vary for married couples.

Provisional Income Taxable Social Security Benefits

Less than $32,000

None

$32,000 to $44,000

Whichever is less out of a) 50% of benefits or b) 50% of provisional income (up to $6,000)

More than $44,000

Whichever is less out of a) 85% of benefits or b) 85% of provisional income 

Requirements for Reporting Taxable Benefits

Retired couple meeting with tax advisor.Your provisional income tax calculations are vitally important. It is your responsibility to ensure the correct tax rate even if you are trying to maximize tax refunds.

The calculations can be complicated, but the IRS can give you a Social Security benefits worksheet to assist you to work out which tax percentage is suitable for your circumstances.

You can work out the tax percentage in the 1040 and 1040-SR Instructions. The taxable amount of your benefits is on line 18 of the worksheet and needs to be transferred to 6b of your Form 1040 tax return.

If you’re using tax software, most will provide a provisional income calculator.

Calculating Provisional Income

Here’s a simple three-step outline of how to calculate your provisional income and Social Security taxes.

Step 1

Start your calculation with your gross income. This is how much you make before you consider any benefits from Social Security. This amount can be found on your tax return. The gross income can also include money you receive from a pension.

Step 2

Add any interest you received but haven’t been taxed on. These include municipal bonds and stocks, which can be tax-exempt at the federal level.

Step 3

Calculate half of your Social Security benefits and add this to the total.

How Provisional Income Affects Taxation

Retiree working at part-time job.Provisional income is such a vital consideration. Many people receiving Social Security benefits also receive additional income from pensions, investments, passive sources, or a part-time job.

Provisional income needs to be considered when you are planning finances. Around 65 million people received Social Security payments last year in the U.S. Just like you would plan for payments on a personal loan, you need to make sure you have planned for paying any taxes that you are liable for. Using a calculation to work out your provisional income is something every taxpayer, or taxpaying couple, should make sure they do.

Sum up

In addition to Social Security benefits, many individuals also receive additional income. As a result, your Social Security benefits may be subject to taxes if your additional income exceeds a certain amount.

It is important to understand which bracket you fall into when calculating your Social Security taxes. Typically, individuals who have higher provisional income will pay a higher percentage.

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