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
Capital gains do not affect Social Security benefits.
Does capital gains tax affect Social Security? ›
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 reduces Social Security benefits? ›
When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net earnings if you're self-employed. We include bonuses, commissions, and vacation pay.
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.
Does selling your house affect your Social Security benefits? ›
Income limitations: Selling your home does not directly impact your eligibility for Social Security benefits. However, if you earn income from the sale, it could potentially affect the taxation of your benefits or eligibility for certain assistance programs.
What income counts against Social Security? ›
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.
Do you have to pay capital gains after age 70? ›
Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the “tax basis.”
What income is not counted against Social Security? ›
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 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.
What is the 5 year rule for Social Security? ›
The Social Security five-year rule is the time period in which you can file for an expedited reinstatement after your Social Security disability benefits have been terminated completely due to work.
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.
At what age can you avoid capital gains tax? ›
Current tax law does not allow you to take a capital gains tax break based on age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales. However, this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
Is capital gains profit considered income? ›
Note: Net short-term capital gains are subject to taxation as ordinary income at graduated tax rates.
How much money can you have in the bank while on Social Security? ›
Social Security will take into consideration the amount of your assets, because it is a needs-based program. To be eligible for SSI, your assets must be less than $2,000 for an individual and less than $3,000 for a married couple.
What affects my Social Security benefits? ›
Your monthly Social Security benefit is determined by four main factors: your work history, your earnings history, your birth year, and your claiming age.
What happens if you have more than $2000 in the bank on SSI? ›
Current beneficiaries who exceed the limits are suspended and then terminated from program participation if their savings remain above the limits, and they must repay any benefits paid while they are over the limit. SSI beneficiaries are limited to only $2,000 in assets of any kind.
Are capital gains provisional income for Social Security? ›
Your provisional income is based on half of your Social Security benefits, plus other sources that contribute to your adjusted gross income, including wages from a job, withdrawals from traditional tax-deferred accounts, and dividends, interest and capital gains from taxable investment accounts.
Do capital gains taxes apply to retirement accounts? ›
With both types of accounts, any earnings, capital gains, or dividends are not taxed as long as they remain in the account. For traditional retirement accounts, you defer paying taxes until you withdraw the money from the account during retirement.
Do dividends and capital gains affect Social Security benefits? ›
However, dividends and capital gains can still affect your ultimate net Social Security benefits due to taxes. At the federal level up to 85% of Social Security benefits are taxable, based on your combined income: Combined income = adjusted gross income + nontaxable interest + half of your Social Security benefits.
