Social Security benefits are paid mainly to retired workers, their surviving spouses and minor children, and people who cannot work due to disability. For retirees, the amount of benefits depends on several factors, including earnings history and age at retirement. Income that workers obtain through investments and other sources outside of wages or self-employment does not affect the amount of the eventual benefit.
Retirement earnings can affect benefits.
For recipients, the age at retirement is a significant part of the benefit calculation. In addition, age influences whether recipients will receive reduced benefits to offset earned income. Beneficiaries who are below full retirement age will experience a benefit reduction if their earnings exceed the threshold. In the years before you reach full retirement age, the threshold is $21,240 (currently). If you earn more than that, your benefits will be reduced by an amount equal to 50 percent of the income above the threshold.
In the year you will reach full retirement age, you can still see a benefit reduction for earnings, but the threshold is higher ($56,520), and the reduction is less (33 percent instead of 50). However, once a recipient reaches full retirement age (your full retirement age depends on your birth year, but for many people, it is 67 or 68), earnings do not affect benefits.
Furthermore, capital gains are not included in the income that Social Security uses to calculate the threshold. Also excluded are investment income, pensions, retirement account withdrawals, interest, and dividends. Only your earnings from working or self-employment are considered income for this purpose, so earning a capital gain will not result in a benefit reduction.
Capital gains could require you to pay taxes on benefits.
While capital gains income will not result in a reduced benefit, it may determine whether you must pay taxes on those benefits. More than half of Social Security recipients pay some income taxes on their benefits. Whether you do and how much depends on your AGI (adjusted gross income) and how much you receive in benefits.
To determine the amount of what Social Security calls your combined income, add your AGI, interest income, and half of your benefit amount. Your gross income includes the following:
- Salary or wages
- Capital gains
- Business income
- Investment earnings
- Dividends
- Alimony
- Retirement account distributions
Suppose you file as part of a married couple with a gross income (including some capital gains) of $50,000 and receive $36,000 in annual Social Security benefits. Your combined income is $68,000 (gross income and half of the benefit amount), which means you will pay income taxes on 85 percent of your benefits.
If the married couple had a combined income between $32,000 and $44,000 (for example, with a gross income of $22,000 and $20,000 in benefits), they would owe taxes on 50 percent of their benefit amount. However, if the combined income is below $32,000, the couple will not pay taxes on any benefits.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
Hypothetical examples shown are for illustrative purposes only.
FAQs
Furthermore, capital gains are not included in the income that Social Security uses to calculate the threshold. Also excluded are investment income, pensions, retirement account withdrawals, interest, and dividends.
Do capital gains affect Social Security income? ›
It's important to note that while capital gains can increase one's adjusted gross income (AGI), they are not subject to Social Security taxes. However, a higher AGI from capital gains can potentially lead to a higher portion of Social Security benefits being taxable.
What type of income does not affect Social Security benefits? ›
For the earnings limits, we don't count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains.
Do capital gains count as income in retirement? ›
Capital gains and dividends
Fully taxable investment vehicles and accounts, such as stock, bonds, and mutual funds are taxed the same whether you're retired or still employed.
Do capital gains count as income? ›
Capital gains are generally included in taxable income, but in most cases, are taxed at a lower rate.
What income affects Social Security payments? ›
When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you're self-employed. We include bonuses, commissions, and vacation pay.
Does home sale count toward the Social Security earnings limit? ›
Social Security Considerations
Selling your home while receiving Social Security benefits may have implications for your eligibility and benefit amounts. Income limitations: Selling your home does not directly impact your eligibility for Social Security benefits.
What are the three ways you can lose your Social Security? ›
Social Security: 4 Ways You Can Lose Your Benefits
- You Forfeit Up To 30% of Your Benefits by Claiming Early. ...
- You'll Get Less If You Claim Early and Earn Too Much Money. ...
- The SSA Suspends Payments If You Go To Jail or Prison. ...
- You Can Lose Some of Your Benefits to Taxes. ...
- You Can Lose SSDI in a Few Different Ways.
Capital gains and other kinds of income- rental payments, inheritances, pensions, interest, or dividends—do not reduce your Social Security payments. So, selling investment property may leave you with a tax bill but won't affect your SSA benefits.
Do capital gains affect Medicare premiums? ›
Answer: A big-enough capital gain can trigger Medicare's income-related adjustment amount, which are surcharges on your Part B and Part D premiums. As you note, there's a two-year delay between the higher income on your tax returns and higher premiums.
When does capital gains tax not apply? If you have lived in a home as your primary residence for two out of the five years preceding the home's sale, the IRS lets you exempt $250,000 in profit, or $500,000 if married and filing jointly, from capital gains taxes.
How much capital gains are tax free? ›
Long-term capital gains tax rates for the 2023 tax year
| FILING STATUS | 0% RATE | 20% RATE |
|---|
| Single | Up to $44,625 | Over $492,300 |
| Married filing jointly | Up to $89,250 | Over $553,850 |
| Married filing separately | Up to $44,625 | Over $276,900 |
| Head of household | Up to $59,750 | Over $523,050 |
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The capital gains exclusion applies to your principal residence, and while you may only have one of those at a time, you may have more than one during your lifetime. There is no longer a one-time exemption—that was the old rule, but it changed in 1997.
Are capital gains added to your total income and put you in a higher tax bracket? ›
Long-term capital gains can't push you into a higher tax bracket, but short-term capital gains can. Understanding how capital gains work could help you avoid unintended tax consequences. If you're seeing significant growth in your investments, you may want to consult a financial advisor.
What is the capital gains tax for people over 65? ›
The capital gains tax over 65 is a tax that applies to taxable capital gains realized by individuals over the age of 65. The tax rate starts at 0% for long-term capital gains on assets held for more than one year and 15% for short-term capital gains on assets held for less than one year.
How do capital gains affect adjusted gross income? ›
Capital gains can be taxed differently, but they are still included in your adjusted gross income. This can affect the tax bracket you are in and your ability to participate in income-based investments.
Do dividends and capital gains affect Social Security benefits? ›
Fortunately, dividends and capital gains won't reduce your gross benefits. However, both dividends and capital gains can affect how your Social Security benefits get taxed and thus impact your net benefits.
What income level avoids capital gains tax? ›
For the 2024 tax year, individual filers won't pay any capital gains tax if their total taxable income is $47,025 or less. The rate jumps to 15 percent on capital gains, if their income is $47,026 to $518,900. Above that income level the rate climbs to 20 percent.
At what age is Social Security no longer taxable? ›
Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.
