Provisional Taxes: What They are and how They Work

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.

Understanding Provisional Income

For the 2021 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.

Provisional Income Thresholds

Different filing statuses have different provisional income brackets that dictate that taxable thresholds for social security benefits. Below are the tables relating to 2021 taxable income.

Provisional Income Limits - Individual Taxpayer

Provisional Income Limits - Married Filing Joint Taxpayers

Example of Provisional Income Taxes

As an example, a single taxpayer with a 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 social security income would be 0%.

For example, let’s say a retiree has $20,000 of income from stocks and part-time employment and $4,000 a year in tax-free interest from municipal bonds. They also receive $24,000 a year in social security benefits (50% of that being $12,000). This retiree’s provisional income is thus $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.

The Bottom Line

Provisional income is a calculated figure used to determine whether a portion of social security benefits are taxable. Each taxpayer can calculate their provisional income by combining their adjusted gross income, non-taxable interest, and half of their social security benefits. Should this amount exceed certain IRS thresholds, the taxpayer may be liable for additional income taxes.

Correction—May 25, 2022: This article was updated from a previous version to make clear the income tax to be paid by a single taxpayer earning a provisional income between 25,000 and 34,000.