Capital gains and Social Security benefit taxes have a circular relationship. If your capital gains and income from other sources is low enough, your Social Security benefits may not be taxable. That, in turn, lowers your taxable income and can decrease the tax rate you pay on capital gains. On the other hand, large capital gains can cause your Social Security benefits to become taxable, which also may increase the amount you'll have to pay the IRS.
Tax on Capital Gains
Regardless of whether or not you receive Social Security benefits, the IRS levies taxes on capital gains. If your capital gains are short-term – meaning that you held the asset for less than a year before you sold it – they're taxed at ordinary income tax rates. For 2020, ordinary income tax rates range from 10 percent to 37 percent depending on your taxable income.
If you held the asset for at least a year, your capital gains are taxed at more favorable long-term rates. Tax rates for long-term capital gains vary based on your tax bracket but max out at 20 percent. If you fall into the 10 percent or 15 percent ordinary tax rate, your long-term capital gain tax rate is zero percent, meaning those gains aren't taxed at all.Your taxable income is what determines the tax rate you'll pay on capital gains.
Tax on Social Security Benefits
Your Social Security benefits may or may not contribute to your taxable income. How much of your Social Security benefits are taxable depends on how much Social Security and other income you receive.
The IRS sets certain base income amounts for married and single couples. As an individual, if your income exceeds $34,000, up to 85 percent of your benefits may be taxable. If you are married and file a joint return, the base figure is $44,000.
If your base income – which is one half of your Social Security plus adjusted gross income and tax-exempt interest – is higher than the IRS base amount, some or all of your benefits will be taxed at ordinary income rates. This is more likely to happen if you're receiving capital gains and income from other sources. If this is the case, the taxable amount will increase your taxable income and could throw you into a higher tax bracket for capital gains.
Paying the Capital Gains Tax
Report your capital gains tax on your annual tax return along with income from all other sources. If capital gains tax is due, it will be included in the total tax owed for your return.
- Kiplinger: 2020 Tax Brackets
- Charles Schwab: Tax Cuts and Jobs Act: What You Should Know
- Bankrate: What is the long-term capital gains tax?
- Social Security Administration: Retirement Benefits
- Internal Revenue Service. "Publication 544 (2018): Sales and Other Dispositions of Assets," Page 20.
- Internal Revenue Service. "Topic No. 409 Capital Gains and Losses." Accessed Feb. 13, 2020.
- Internal Revenue Service. "IRS provides tax inflation adustments for tax year 2020."
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.