Do This and You Won’t Pay Tax on Your Social Security Benefits

In 1983, and again in 1993, provisions were made to the tax code to allow for the taxation of Social Security benefits.  If your income was above a certain provision some of your benefits were taxed. Thus the term “provisional income” came to describe how much of your Social Security benefits are taxed.  Oddly, go to SSA.gov and type “provisional income” into the search button and see what you come up with; Nothing.  Go to IRS.gov and type in “provisional income”. Again, nothing.  Now, don’t get me wrong, both of these sites have tons of information on how benefits are taxed.  Here’s the IRS for example:  a quick way to find out if a taxpayer must pay taxes on their Social Security benefits: Add one-half of the Social Security income to all other income, including tax-exempt interest. Then compare that amount to the base amount for their filing status. If the total is more than the base amount, some of their benefits may be taxable. Base Amounts. The three base amounts are: $25,000 – if taxpayers are single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2018 $32,000 – if they are married filing jointly $0 – if they are married filing separately and lived with their spouse at any time during the year Clear as mud, no?  This complexity is why the vast majority of Americans have no clue how their Social Security benefits are taxed, to include most financial advisors. This is unfortunate given how many Americans rely heavily on their Social Security in retirement.   Understanding Provisional Income Kiplinger’s magazine is a good source for Social Security information. They write: “Your provisional income is your adjusted gross income, not counting Social Security benefits, plus nontaxable interest and half of your Social Security benefits”(emphasis mine).  To illustrate how this works let’s bring back John and Judy. We’ll say they have $100k of total income which consists of $45k in Social Security, $40k of pension and IRA distributions and $15k of tax-exempt municipal bond interest.  To calculate their provisional income, we simply add half of their Social Security benefits to their pension and IRA distributions.