Understanding Provisional Income & How It Affects Taxes On Your Social Security

Retire Ready with Kyle Hammerschmidt

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In this episode, Kolin and Kyle discuss step number one of a tax-efficient retirement plan: provisional income. Provisional income is used to determine whether a portion of your Social Security benefits are taxable. The four components of provisional income are non-taxable interest, ordinary income, dividends and capital gains, and half of the household Social Security benefit. They provide examples of two different strategies: the traditional strategy, where most income is subject to federal tax rates, and a tax-efficient strategy, where proactive tax planning is used to lower the tax bill and keep more of the Social Security benefits. They emphasize the importance of running the numbers and considering different strategies to maximize tax efficiency in retirement.

Takeaways

• Provisional income is used to determine whether a portion of your Social Security benefits are taxable.
• The four components of provisional income are non-taxable interest, ordinary income, dividends and capital gains, and half of the household Social Security benefit.
• There are different strategies to maximize tax efficiency in retirement, such as the traditional strategy and a tax-efficient strategy that involves proactive tax planning.
• Running the numbers and considering different strategies can help lower the tax bill and keep more of the Social Security benefits.

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Disclosure: You should always consult a financial, tax, or legal professional familiar with your unique circumstances before making any financial decisions. This podcast is intended for educational purposes only. Nothing in this podcast constitutes a solicitation for the sale or purchase of any securities. Any mentioned rates of return are historical or hypothetical in nature and are not a guarantee of future returns. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. MOKAN Wealth Management is a registered investment adviser with the SEC. Registration of an investment adviser does not imply a certain level of skill or training.

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1. Introduction (00:00:00)

2. How to Calculate Provisional Income (00:01:24)

3. Example of How Most Do It (00:07:48)

4. Example of Tax-Efficient Provisional Income (00:13:54)