Provisional income is a type of income calculation that is used to determine if a recipient must pay any type of tax obligation on funds disbursed from some sort of government pension program. The idea is to determine if the gross income generated by the taxpayer from all sources is sufficient to call for assessing taxes on any funds received from that pension plan. Calculating provisional income usually comes about when a retiree is drawing monthly payments from the pension but also continues to maintain a part-time job.
While the exact process for calculating provisional income will vary slightly based on the tax laws that currently apply in the jurisdiction where the taxpayer lives, the usual approach calls for identifying the gross income earned from any type of ongoing employment during the period. This includes any part time employment or even any funds that are earned as the result of doing occasional work as an independent contractor. To the gross income, as much as half of the pension paid out over the course of the tax period is added. If the taxpayer received any type of tax-free interest during the period under consideration, this is also included in the calculation.
Deductions that reduce the amount of provisional income are also taken into account. This means that any adjustments to the total income that are allowed under current tax laws will be taken into consideration. True provisional income is identified as what is left after all sources of income, including up to half of the government pension, are accounted for, and all possible adjustments to that figure are deducted.
Typically, it is necessary to include the final figure of provisional income on tax returns. From there, any additional claims or deductions can be applied. This makes it possible to then use the current tax table to determine if the taxpayer in fact owes any additional taxes, or even if the taxpayer may be due some sort of refund.
The calculation of provisional income is common in many nations, including the United States. Individuals who currently receive any type of benefits through the Social Security Administration and also receive some sort of taxable income from other sources will use a particular form to identify those types of income, then account for any adjustments that would reduce the total amount of provisional income. After utilizing the form to determine this amount, it is possible to proceed with calculating the taxes owed, as well as determining if a tax refund of some sort may be due to the taxpayer.
