What Is Provisional Income?

Provisional income is an IRS threshold above which social security income is taxable. The base, from §86 of the Internal Revenue Code (IRC), triggers the taxability of social security benefits, requiring its inclusion in gross income tax payment on excess amounts. Provisional income is calculated using the recipient’s gross income, tax-free interest, and 50% of their Social Security benefits. 

Key Takeaways

  • Provisional income levels determine the level in which social security income can be taxed.
  • The base for provisional income is from §86 of the Internal Revenue Code.
  • Provisional income levels are calculated with gross income, tax-free interest, and half of the recipient's Social Security amount.

Understanding Provisional Income

For the 2019 tax year, 15% of all social security benefits remain tax-free. The remaining 85% is also tax-free unless the taxpayer has provisional income above a base amount set for the taxpayer’s filing status. Ultimately, the taxable amount depends on how much the provisional income exceeds the base amount and the percentage or percentages applicable to determine it.

Calculating Provisional Income

Although IRC §86 does not use the term “provisional income,” it is commonly used to refer to this sum. To calculate provisional income, the taxpayer must add together their gross income, tax-exempt interest and one-half of the taxpayer’s social security benefits. 

To determine provisional income, the taxpayer must compute their gross income without Social Security benefits, or the amount of income they collect before drawing Social Security. Then, they should add any tax-free interest they receive from investments, and finally, add one-half of Social Security benefits reported on Form 1099.

Provisional income falling below the base amount established by filing status is untaxed. Taxes are only due on amounts above the base amount shown. Depending on filing status, and the amount of excess provisional income, up to 85% is taxable as gross income at the same rate as regular income.

Example of Provisional Income Taxes

As an example, a single taxpayer with provisional income between $25,000 and $34,000 would pay taxes on the lesser of either 50% of social security benefits or 50% of the difference between the provisional income and the base amount. If the same taxpayer has provisional income in excess of $34,000, the taxable percentage will increase to 85%. In other words, for every $1 of provisional income over $25,000, 50¢ may be subject to federal income tax. This amount raises to 85¢ of every dollar for amounts over $34,000. However, if the single taxpayer’s provisional income were below $25,000, the taxable percentage of his or her Social Security income would be zero percent.

For example, let’s say a retiree has $20,000 of income from stocks and part-time employment. He or she also earns $2,000 a year in tax-free interest from municipal bonds. That adds up to $24,000. They also receive $24,000 a year in Social Security benefits—50% of that amount is $12,000. This retiree’s provisional income is $36,000, and that places them in the 85% tax bracket.

A detailed explanation of the taxation of social security benefits is available in the Internal Revenue Service (IRS) Publication 915, Social Security and Equivalent Railroad Retirement Benefits. The publication contains hyperlinks to blank worksheets on page 15 useful to accurately calculate the taxable portion of social security benefits.