Determining Temporary Adjusted Gross Income
Determining Temporary Adjusted Gross Income
Initially, Social Security benefits were exempt from federal income tax, but this changed in 1983, making them partially taxable. In 1993, an additional income threshold was introduced, increasing the percentage of benefits subject to taxation. Some Social Security recipients are exempt from paying taxes on their benefits, while others are required to do so. The IRS uses provisional income to determine if taxation is necessary.
Provisional income is calculated by adding up a recipient's gross income, tax-free interest, and half of their Social Security benefits.
Calculating Provisional Income
Three steps for calculating provisional income
- Start with your gross income, which is the total amount of income you earn, excluding 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 half of your Social Security benefit and add that amount to your previous total.
Less than $25,000
For instance, let's say your gross income is $20,000, and you earned $2,000 in municipal bond interest. Add these amounts together to make $22,000. Now, let's assume you receive $24,000 in Social Security benefits. Divide that in half to get $12,000. Add $22,000 and $12,000, and your provisional income will be $34,000.
0%
How Provisional Income affects Taxation
How provisional income affects taxation
$25,000 - $34,000
| 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% |
Up to 50%
Investing in stocks is an additional income source in retirement. To do this, you'll need a brokerage account, which you can explore in our brokerage section.
Related Investing Topics
More than $34,000
Related Investing Topics
Up to 85%
Social Security Earnings Test: Know Your Benefits
The Social Security earnings test determines your benefits' limit before part of them are withdrawn.
Less than $32,000
Does IRA Distribution Count as Income for Social Security?
0%
IRA distributions won't affect your ability to collect Social Security, but they might be considered income for another reason.
Understanding Taxation of Your Retirement Income
$32,000 - $44,000
Retirement doesn't mean living tax-free.
Up to 50%
Full Retirement Age for Getting Social Security
The age at which you can retire and collect Social Security depends on the year you were born.
More than $44,000
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Up to 85%
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After calculating provisional income, some individuals might need to pay taxes on their Social Security benefits based on their income level. For instance, if a single or head of household earns less than $25,000 annually but receives more than $25,000 in Social Security benefits, they would pay up to 50% of the excess amount in taxes. This illustrates the impact of provisional income on Social Security taxation. Additionally, managing one's investments wisely, such as investing in stocks, can be another income source during retirement, requiring the use of a brokerage account.