Tax avoidance and reduction are typically high on people’s financial list. Knowing about provisional income? Not so much.
Taxes on your social security and your income sources impact the amount of money you have in retirement. Some good old planning can help you reduce and sometimes eliminate your social security from being taxed.
This is where provisional income comes into play.
The Provisional Income Calculation
Provisional income is the calculation to determine if and how much your taxes will be on your social security.
It’s your adjusted gross income plus 1/2 of your social security benefit and other non-taxable interest such as tax-exempt bonds. If your total provisional income is below $25,000 filing individually and $32,000, jointly you will not pay taxes on your social security.
There is a threshold for individuals whose provisional income is in the range of $25,000 – $32,000 and for married couples of $32,000 – $44,000 where 50% of your social security is subject to taxes. Over these thresholds and that inclusion rate goes to 85% of your social security included in taxes.
It doesn’t mean that you will pay 50% or 85% in taxes, only that 50% or 85% of your social security will be included in the tax calculations.
Earning more by working less
I hear people say they will stop working, so their social security doesn’t get taxed.
They are people who believe that if they never invest they won’t lose money.
In the short term, they may both be true. But in the long-term, they’re both probably making a poor choice.
It isn’t always a good reason to keep your income lower by avoiding work to avoid your social security from being taxed.
If you are working and electing social security before full retirement, then you may be subject to higher taxes. That’s because you are making more money!
For 2013, that limit is $15,120.
However, you’ll get an increase in your monthly social security benefit once you reach full retirement age. If your income is one of your highest years, you may also get your social security recalculated to a higher amount.
It’s important to understand your social security and provisional income so you can overcome this myth. Working less so you net more isn’t always the best solution.
Working may reduce your social security in the short term, but your future income will be higher as a result. Being near sighted can cost you. Get all the facts on provisional income, taxes and social security.