Navigating the Complexities of Social Security and Investment Income
As you approach retirement, understanding how various income sources impact your Social Security benefits becomes crucial. This article delves into the intricate relationship between capital gains and Social Security, clarifying how this investment income affects your benefits and potential tax implications.
Capital Gains and Social Security Benefits: A Clear Distinction
The good news is that capital gains, unlike earned income, do not directly impact the calculation of your Social Security benefits. This means that regardless of the capital gains you realize, your monthly benefit amount remains unaffected.
The Impact of Capital Gains on Social Security Taxes
While capital gains don’t influence your benefit amount, they can play a role in determining the taxability of your Social Security benefits. This is because capital gains contribute to your adjusted gross income (AGI), which is a key factor in calculating the taxable portion of your benefits.
Understanding the AGI Thresholds and Tax Implications
The Social Security Administration (SSA) has established AGI thresholds that determine the percentage of your benefits subject to taxation. If your AGI, including capital gains, falls below a certain level, your benefits remain tax-free. However, if your AGI exceeds the threshold, a portion of your benefits becomes taxable.
The 50% and 85% Tax Rates: Understanding the Impact of AGI
The SSA applies two different tax rates to your Social Security benefits based on your AGI:
- 50% tax rate: If your AGI falls between $25,000 and $34,000 (or $32,000 and $44,000 for married couples filing jointly), 50% of your benefits become taxable.
- 85% tax rate: If your AGI exceeds $34,000 (or $44,000 for married couples filing jointly), 85% of your benefits become taxable.
Capital Gains and Social Security: A Summary
- Capital gains do not directly affect your Social Security benefit amount.
- Capital gains can contribute to your AGI, potentially leading to a higher portion of your benefits being taxable.
- The SSA applies different tax rates based on your AGI, with higher AGIs resulting in a higher taxable portion of your benefits.
As you plan for retirement, it’s essential to consider how various income sources, including capital gains, might impact your Social Security benefits and potential tax implications. By understanding the interplay between capital gains and Social Security, you can make informed financial decisions to optimize your retirement income and minimize your tax burden.
Additional Resources:
- Benefits Planner: Retirement | What Income is Included in your Social Security Record? | SSA: https://www.ssa.gov/benefits/retirement/planner/annuities.html
- Do Capital Gains Affect Social Security? | Realized: https://www.realized1031.com/blog/do-capital-gains-affect-social-security
Keywords: capital gains, social security, benefits, taxes, AGI, retirement planning, investment income
Retirement earnings can affect benefits.
The age of retirement for recipients plays a big role in determining how much benefits they will receive. Furthermore, recipients’ age determines whether their benefits will be reduced to offset their earned income. If a beneficiary’s earnings surpass the threshold and they are not yet at full retirement age, their benefits will be reduced. The current threshold in the years prior to reaching full retirement age is $21,240. Should your income surpass that threshold, your benefits will be lowered by 50% of the excess income.
You will still see a reduction in benefits for earnings the year you reach full retirement age, but the reduction will be smaller (33 percent as opposed to 50 percent) and the threshold will be higher ($56,520). Earnings, however, have no bearing on benefits once a recipient reaches full retirement age, which varies depending on birth year but is typically 67 or 68.
Moreover, the income that Social Security uses to determine the threshold does not include capital gains. Investment income, pensions, withdrawals from retirement accounts, interest, and dividends are also not included. For this purpose, only your income from employment or self-employment is taken into account, so realizing a capital gain will not result in a reduction in benefits.
Capital gains could require you to pay taxes on benefits.
Although capital gains income won’t lower your benefits, it might affect whether you have to pay taxes on them. On their benefits, more than half of Social Security recipients pay income taxes. Your adjusted gross income (AGI) and benefit amount determine whether and how much you do.
Add your interest income, half of your benefit amount, and your AGI to find the amount that Social Security refers to as your combined income. Your gross income includes the following:
- Salary or wages
- Capital gains
- Business income
- Investment earnings
- Dividends
- Alimony
- Retirement account distributions
Assume you file jointly with your spouse, earning $50,000 in gross income (including some capital gains) and receiving $36,000 in Social Security benefits each year. You will pay income taxes on 85% of your benefits because your combined income is $68,000 (gross income plus half of the benefit amount).
The married couple would be taxed on 50% of their benefit amount if their combined income was between $32,000 and $44,000 (for instance, $22,000 gross income and $20,000 in benefits). However, the couple will not be required to pay taxes on any benefits if their combined income is less than $32,000.
This material is for general information and educational purposes only. Information is based on data collected from sources we consider to be trustworthy. It does not claim to be comprehensive, has no accuracy guarantee, and should not be the main source of information when making investment decisions. Additionally, it shouldn’t be interpreted as advice tailored to any investor’s specific investing requirements.
Realized does not provide tax or legal advice. This information should not be used in place of consulting a qualified professional about your specific situation.
Hypothetical examples shown are for illustrative purposes only.
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Can Capital Gains Force Me to Pay Taxes on Social Security
FAQ
What type of income reduces Social Security benefits?
How does selling property affect Social Security benefits?
Does capital gains income reduce Social Security benefits?
What kind of income does not count against Social Security?
How does capital gains affect Social Security tax?
As you create more income (for instance by realizing capital gains), a part of your Social Security benefits will be taxed, but at a low rate. As a result, your overall tax rate is still very low. If you realize more gains, more of your Social Security tax will be taxed and at a higher rate.
How does retirement affect Social Security tax?
The sources from which a retiree withdraws income can affect how much of their Social Security is taxed. Ordinary income can increase a retiree’s capital gains tax rate. Capital gains tax brackets also come into play with planning strategies like Roth conversions.
How can capital gains affect your post-retirement financial health?
These connections can significantly influence your post-retirement financial health, affecting the amount of disposable income you have in your golden years. Capital gains can influence the amount of your Social Security benefits that are subject to taxation.
Can ordinary income increase a retiree’s capital gains tax rate?
Elsasser also emphasized that ordinary income can increase a retiree’s capital gains tax rate. In 2021, the 0% bracket for the capital gains tax was $83,350. Add the standard deduction, and a couple could earn up to $112,050, in capital gains and ordinary income combined, before being liable for any capital gains tax.