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Provisional Income

| March 13, 2018
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What is Provisional Income?

    Once you begin receiving Social Security benefits you will need to become familiar with the term provisional income. Why? Because its calculation will determine the amount of your SS benefit that will be subject to taxation. You begin with your Social Security benefit itself and then only include one-half of it in the calculation. Tip – delaying your Social Security claim to gain additional income later that only has one-half included in the provisional income calculation might be valuable. Next, add ordinary income (such as wages, interest income, IRA distributions), dividends and capital gains and certain non-taxable interest (such as municipal bond interest) to the calculation.

    At this point you will look at the tax thresholds depending on your filing status (Single or MFJ). If your provisional income is $32,000 or less and you file a joint return ($25,000 for individuals) then NONE of your Social Security benefit is taxable. Between $32,000 and $44,000 for joint filers ($25,000 and $34,000 for individuals) up to 50% may be subject to taxation, and above $44,000 for joint filers ($34,000 for individuals) then up to 85% may be subject to taxation.

    So let’s look at an example: Bob and Sue file jointly and have Social Security income of $40,000 and IRA distributions of $20,000 for gross income of $60,000. However, their provisional income is only $40,000 (1/2 of their SS benefits ($20,000) + $20,000 IRA distribution). They have $8,000 above the $32,000 threshold and none above the second so only $4,000 is taxable. Think about that for a minute…I’ll wait. Only 10% of their benefit was taxable. Or on the other hand it means that 90% of their benefit was TAX FREE.

    What if the figures were reversed? Bob and Sue still have gross income of $60,000, but now only $20,000 comes from Social Security. Therefore, their provisional income now rises to $50,000 (1/2 of SS benefits ($10,000) + $40,000 IRA distribution). They now have $12,000 above the 50% threshold ($6,000 is taxable) and $6,000 above the 85% threshold ($5,100 is taxable) for a total of $11,100 subject to taxation. This means 55.5% of their benefit is taxable. What a difference in spendable income even though the gross income didn’t change!

The hypothetical examples provided do not represent an actual investment. There are no guarantees similar results can be achieved. This is for informational and educational purposes only.
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