How to Calculate Provisional Income (a.k.a. Combined Income)

School of Social Security & Medicare

A person looking at a chalkboard filled with complex mathematical calculations. This is meant to represent calculating provisional income or combined income.

Social Security benefits are an important source of income for many Americans. Initially, these benefits were exempt from taxation. However, since 1983, those benefits can be subject to income tax under certain circumstances.

Social Security provides over 50% of Americans’ retirement income, but many retirees have other sources of income outside of Social Security. For those with additional income, understanding the concept of provisional income and how it is calculated can be an important step in minimizing their tax burden during retirement.

How to Calculate Provisional Income

The calculation for provisional income is rather simple. Start with your adjusted gross income [AGI] from your tax return, excluding Social Security benefits. This figure could include wages, self-employment income, pension benefits, dividends, interest, or any other form of taxable income.

Next, add interest income that is nontaxable at the federal level, such as municipal bond interest or interest earned on assets inside a Roth retirement account. Finally, add one half of Social Security benefits from your Form SAA-1099. Keep in mind, married couples should include income from both spouses.

When this calculation is complete, the result is what the Social Security Administration calls “combined income”, otherwise referred to as provisional income.

How Provisional Income Affects Taxation

Similar to the income tax system, there are cutoffs for provisional income that affect the taxation of Social Security benefits at different levels of income. These magic numbers are $25,000 and $34,000 for individuals, and $32,000 and $44,000 for joint filers.

Reaching either of those two income thresholds greatly increases the tax exposure of an individual’s or couple’s Social Security benefits. The respective tax burdens are:

  • 0% for those individuals who have provisional income below $25,000 ($32,000 for joint filers)
  • up to 50% for individuals who have provisional income above $25,000 but below $34,000 ($32,000 to $44,000 for joint filers)
  • up to 85% for individuals who have provisional income above $34,000 ($44,000 for joint filers)

Calculating Your Tax Burden for Social Security Income

Calculating your individual tax burden for Social Security income is a bit more involved. But for those in the middle category listed above, it looks something like this:

The amount of income to include is the lesser of:

  • 50% of the annual Social Security benefits received, or
  • 50% of the excess of the filer’s provisional income, over the threshold.

Detailed examples on how to calculate the tax burden for Social Security income can be found at the IRS website.

Using Your Provisional Income to Minimize Your Tax Burden

Income taxes can greatly reduce your retirement income and in some cases a high tax burden can keep you from living the retirement of your dreams. That’s why it is important to have a plan in place for managing taxes during your retirement years.

The first step in an effective tax plan is to forecast your future tax burden. Then you can work with a group of experienced professionals to find ways to minimize the amount you owe in taxes. Understanding your provisional income, and the amount of tax you could owe on your Social Security benefits, is an important step in your tax mitigation plan.

An experienced financial advisor, like those at Meld Financial, can help you calculate your provisional income and forecast the amount you could owe each year in taxes. Additionally, our team of tax, legal, and investment professionals, can offer solutions for minimizing your tax burden that are tailored to your specific situation.

Work with Meld Financial to Develop Your Financial Fingerprint™.

Social Security planning can be a very complicated endeavor. However, the financial planners at Meld Financial can leverage their vast experience, in conjunction with a team of tax, legal, and financial professionals, to help you develop your Financial Fingerprint™.

Your Financial Fingerprint™ is a unique planning process developed at Meld Financial through decades of managing our clients’ wealth. In short, your Financial Fingerprint™ is a comprehensive financial plan that is quick to assemble, easy to understand and simple to modify as your circumstances change.

With your Financial Fingerprint™, and an ongoing relationship with an experienced financial advisor, you can effectively manage your tax burden and turn your dream retirement into a reality. Contact Meld Financial today to get your Financial Fingerprint™.

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