Do Dividend Payments Affect Social Security Payments?

Do Dividend Payments Affect Social Security Payments?
••• Photodisc/Photodisc/Getty Images

Since dividends may make up a significant portion of a retiree's income, you might wonder, "Does investment income affect Social Security?" You may also wonder, “Do I pay Social Security tax on investment income?” Well, it depends.

Generally, the impacts of dividends are fairly benign: They are usually taxed at the long-term capital gains rate and never count as earnings subject to Social Security tax. The bad news is that the maximum earnings subject to Social Security tax rose in 2021.

How Dividends Work

Dividends are distributions to shareholders from the earnings and profits of corporations. They are usually paid in cash but may take the form of additional stock or some other property.

Dividends are classified as either qualified or nonqualified, which affects how they are taxed. Most U.S. corporate dividends are qualified, which means they may be subject to the long-terms capital gains (LTCG) rate. Nonqualified dividends are taxed as ordinary income at your marginal tax rate.

The capital gains distributions of mutual funds and ETFs are often loosely referred to as dividends, but strictly speaking, they are distributions. They result from dividends in the fund’s portfolio and capital gains that a fund earns on the sale of stocks or other assets. Capital gains distributions are always taxed as long-term capital gains.

If you receive ​more than $10​ in dividends, the payer will send you Form 1099-DIV, Dividends and Distributions, with the information you need to account for and pay taxes on dividends and capital gain distributions.

Dividends and Social Security Taxes

Workers pay Social Security tax of ​6.2 percen​t on their employment earnings (​12.4 percent​ for self-employment earnings), up to the maximum taxable earnings for the year. In 2021, the Social Security earnings maximum rose to ​$142,800 from the previous year’s maximum of ​$137,700​.

The Social Security taxes apply to earned income, wages or net self-employment income. However, you don't have to pay Social Security tax on investment income, including dividends, capital gains and interest from investments and savings.

Dividends and Social Security Benefits

You can begin receiving Social Security benefits ​as early as age 62​ or ​as late as age 70​. The amount you receive each month depends upon your earnings and your age when you first claim payments. Your benefits increase every year you delay claiming them up to age 70.

Your Social Security benefits will be partially withheld if:

  1. You claim them before reaching full retirement age (​66 or 67,​ depending on when you were born), and
  2. You continue to work and
  3. Your earnings from work exceed the retirement earnings test exempt amount (RETEA).

Note that you don’t lose the withheld benefits. Rather, your monthly benefits will incorporate the withheld amount once you reach full retirement age.

The 2021 RETEA for those reaching full retirement age after 2021 is ​$18,960​. The withheld amount is ​$1 in benefits​ for every ​$2 in earnings​ above this RETEA. If you reach full retirement age in 2021, the RETEA is ​$50,520​ on earnings made before the month you reach full retirement age. The withheld amount is ​$1 in benefits​ for every ​$3 in earnings​ above this RETEA.

The RETEA is applied to earnings from work. Passive income, including dividends, does ​not​ count as earnings subject to the RETEA. Withholding ends once you reach full retirement age.

Dividends and Income Taxes

Qualified dividends are taxed at the long-term capital gains rate. To qualify for them, you must hold the dividend-paying common stock for at least ​61 days​ during the ​121-day period​ beginning ​60 days​ before the stock’s ex-dividend date (the date the stock’s price is reduced by the dividend amount).

Preferred stock has longer holding periods. The long-term capital gains tax rates for single filers as of 2021 are:

  • 0 percent​: For taxable income below $40,400
  • 15 percent​: For taxable income between $40,400 and $445,850
  • 20 percent​: For taxable income above $445,850

Different thresholds apply for those married jointly, qualified widows and widowers, married but filing separately, and heads of households. So take note of that. In addition, dividends and other investment income may be subject to net investment income tax at the rate of ​3.8 percent​ for individuals with an annual modified adjusted gross income of ​$200,000​ or more (​$250,000+​ for married filing jointly).