Does investment income affect social security benefits

In 2022, 65 million Americans will receive benefits from Social Security. About eighty percent of those are retirees, and most of the remainder are individuals who qualify for payments due to disability. Finally, three percent are the minor children of workers who died. Social Security benefits are based on people's contributions through payroll taxes, determined by their earnings. However, benefits are also progressive, so payments to beneficiaries are a higher percentage of previous earnings for workers with lower earning levels. Only earned income (salary or other wages) or net income from self-employment counts toward Social Security and is subject to the withholding contribution. Capital gains are not part of this income.

How Does Retirement Income Affect Social Security Benefits

Most citizens qualify for Social Security benefits when they reach the age of 62 if they have accrued sufficient “work credits.” Workers earn credits by participating in paid employment for a specified time. Others become eligible due to their inability to work or, in the case of minors, if their financially responsible parent dies. However, retiring as soon as the taxpayer turns 62 will permanently limit the amount of money the individual can receive compared to the amount they could get by waiting to claim benefits until they are at full retirement age.

Similarly, earning income in retirement is affected by the retiree's age. For example, if the recipient is 62 or any age less than full retirement (which is 70 for most people), the SSA will reduce their benefits partially, depending on how much money they make. After they reach a threshold, the benefit will decrease by $1 for every $2 the beneficiary earns. However, once the recipient reaches the designated full retirement age, income does not result in a corresponding benefit drop.

Capital Gains Income Is Different from Ordinary Income

If a taxpayer holds an investment property for more than a year before selling, the income obtained is capital, not ordinary income. Still, capital gains are taxable, although typically at a lower rate than the investor would pay on regular income. For example, suppose you have an annual income of between $41,676 and $459,750 as a single filer. In 2022 your capital gains tax rate is fifteen percent. In contrast, for ordinary income, the rate would be at least 22 percent and as much as 32 percent.

Also, capital gains—and other kinds of income like 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.

However, for individuals with very high incomes, there is an additional consideration: the Net Income Investment Tax (NIIT). This tax is 3.8 percent that the IRS collects on investment income for those with incomes above specific threshold amounts. The levy applies to capital gains, interest, rental and royalty income, and passive business income, but not salary, wages, or Social Security benefits. Those sources of income are part of the calculation to determine if you are subject to the tax, however, which is determined by calculating your MAGI (modified adjusted gross income).

Consider the Timing of Your Sale

If you are planning for retirement and nearing full retirement age, calculating what to keep and what to sell may be influenced by your income threshold before retirement and where you anticipate ending up. For example, even though the capital gains tax is almost always lower than the tax on ordinary income, it's still higher for taxpayers with more significant income. So, consider whether waiting for retirement might make sense to take advantage of a lower capital gains tax rate.

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