Hey Reader,

Here is something most Americans never learn until they are sitting across from their accountant in February — stunned and frustrated by a tax bill they never saw coming.

Up to 85 percent of your Social Security benefits can be taxed as ordinary income.

Not a fixed rate. Not a flat tax. Ordinary income — meaning it stacks on top of everything else you earn and pushes you into a higher bracket at exactly the moment you can least afford it.

Here is how it works.

The Provisional Income Rule

The IRS does not use your adjusted gross income to determine how much of your Social Security gets taxed. It uses something called provisional income — a calculation most people have never heard of until it is too late to do anything about it.

Your provisional income is calculated as follows:

Your adjusted gross income, plus all tax-exempt interest you received during the year, plus 50 percent of your total Social Security benefits.

That combined number determines how much of your Social Security benefit is subject to federal income tax.

Here are the 2026 thresholds:

For single filers: if your provisional income exceeds $25,000 up to 50 percent of your Social Security benefit becomes taxable. If it exceeds $34,000 up to 85 percent becomes taxable.

For married couples filing jointly: the 50 percent threshold begins at $32,000. The 85 percent threshold begins at $44,000.

These thresholds have not been adjusted for inflation since 1983. Which means that every year, as Social Security benefits increase and retirement account balances grow, more Americans cross them without realizing it.

A Real Example

Consider a retired couple receiving $40,000 per year in Social Security benefits. They also withdraw $30,000 from their traditional IRA to cover living expenses.

Their provisional income calculation looks like this:

$30,000 in IRA withdrawals, plus $20,000 which is 50 percent of their Social Security, equals $50,000 in provisional income.

At $50,000 they are well above the $44,000 married filing jointly threshold. Up to 85 percent of their $40,000 Social Security benefit — $34,000 — is now subject to federal income tax as ordinary income.

The result is a tax bill they did not plan for, on income they assumed was largely protected.

The Strategy Most People Miss

Here is where the planning opportunity lives — and why it matters whether you are already retired or still years away from it.

Roth IRA withdrawals do not count toward provisional income. Neither do withdrawals from a Health Savings Account for qualified medical expenses. Neither does return of basis from non-deductible IRA contributions.

That same retired couple could have pulled $30,000 from a Roth IRA instead of a traditional IRA. Their provisional income would drop to $20,000 — well below both thresholds. Their Social Security benefits would be completely tax free.

Same lifestyle. Same spending. A fraction of the tax bill.

Which account you pull from in retirement matters as much as how much you pull. In many cases it matters more.

The Action Step for This Week

If you are already retired: calculate your provisional income right now using the formula above. If you are approaching either threshold, speak with a CPA about Roth conversions, HSA drawdowns, or adjusting your withdrawal sequence before December 31st — that is when your options for this tax year expire.

If you are still working: this is exactly why building a Roth IRA or Roth 401k alongside your traditional accounts matters. Every dollar in a tax-free account today is a dollar that does not count against your Social Security threshold in retirement.

The rule was always there. Most people just find out about it too late to use it.

Talk soon,

Grant
The Compound View