Do People on Social Security Have to Pay Tax on Cashed-in Stock?
If you're hoping to make a little extra money to supplement your Social Security by cashing in your stock, you need to estimate how much you're going to pay in taxes before you spend the entire amount. The amount you pay varies by three factors. These factors include the amount of profit, the length of time you held the stock and your overall income, including your Social Security.
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Gains
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Estimate the gains you'll have on the stock you cash out before you sell it. Even though you might sell the stock for thousands of dollars, if you paid more for it than you sell it for, there's no income tax to pay. Even if you received the stock because an insurance company changed from a mutual company to a stock company, in effect, you still paid for the stock. The amount you paid, according to a court case with the IRS, is the value of the stock the day they issued it to you.
Long-Term or Short-Term Gains
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If you held the stock under a year, you'll pay short-term gains on it. This means you pay on the gains as you would on ordinary income. If you held it over a year, you'll pay long-term capital gains, which is much lower, depending on your tax bracket. Before you begin bemoaning your fate, you still have another calculation to make.
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Total Income
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Paying the capital gains tax might not be a problem if you have no other income or it isn't very high, but it could mean you'll have to pay taxes on as much as 85 percent of your Social Security benefits if it increases your annual total income too much. In order to calculate how much the IRS counts as total income, you have to add all income, including capital gains, other pensions, the taxable portion of annuity income and non-taxable income such as municipal bond income, to half of your annual Social Security income. Once you find your total income, you'll find out how much your tax on Social Security is and can estimate your capital gains tax.
Taxing Social Security
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If you're single and your total income you calculated above is over $25,000, it means you'll have to pay not only capital gains on the stock, but also income tax on at least half of the Social Security. If your total income is more than $34,000, you have to pay tax on the capital gains and income tax on 85 percent of your Social Security. If you're married filing jointly, the amount you count as total income is half both of your annual Social Security payments and all other income. If the amount is over $32,000, you pay tax on 50 percent of your Social Security in addition to the capital gains tax on the stock. At $44,000, you'll pay tax on 85 percent of your Social Security in addition to the capital gains tax.
No Tax?
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If you don't have to pay tax on any of your Social Security, you may not have to pay on your gains either. For 2009, you could deduct a standard deduction of $5,700 if you were single or $11,400 married filing jointly from that amount plus $3,650 for each exemption plus an additional $3,650 for each person over 65. Even if you show a taxable amount, you might still have a much lower rate or have to pay no income on the gain at all, if it's a long-term capital gain.
Be Wise, Time Your Sales
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If you believe you might have to pay tax on your Social Security or the stock proceeds because the gain is too high, time your sales. Divide the stock into smaller amounts and sell a little each year, to keep you under the taxable limit for both your Social Security and capital gains.
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