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.
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.
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:
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.