Question

Social Security Benefits Practice

In 2019, Evelyn is age 66 and unmarried. She receives $14,000 in social security benefits and $16,000 in taxable pension. She is in the 12% tax bracket and takes the standard deduction. She is thinking of selling stock she bought in 2006 and paid $5,000 for. The fair market value of the stock is $13,000. She has no other gains or losses.

Calculate and classify the gain or loss if Evelyn sells her stock in 2019.

Calculate any difference in her tax liability if Evelyn sells her stock in 2019.

Answer 1

Solution:

Social Security is paid to retirees, disabled persons, and families of retired, disabled or deceased workers.

Evelyn is single and is in 12% tax bracket which means her taxable income is between 9700$ to 39475$. Assuming, apart from retiral benefits and capital gain, her regular taxable income before standard deduction is 22200$.

Ans1. Capital gain Calculation:

Net Proceeds (Assuming expenses on sale is zero):   13000$

(-) Purchase consideration:                                             5000$

Long term capital gain(As held for more than one year): 8000$

Calculation of Tax on Social security benefits

1. Total SSB – 14000$
2. 50% of SSB (Taxable)- 7000$
3. Other Income: $ 22200
4. Pension: 16000$
5. Long term Capital Gain (13000-5000) : 8000$
6. Adjusted Gross Income (Without adjustments: 3+4+5): 46200$
7. Total Income(6+2): 53200$
8. Modified Adjusted Gross Income: 25000$
9. Balance : (8-7) 28200$
10. Factor : 9000$
11. Balance: 19200$
12. Smaller of above two: 9000$
13. 50% of above: 4500$
14. Balance Factor* 85%(11*85%): 16320$
15. Total of above two: 20820$
16. SSB *85%: 11900$
17. Smaller of above two: 11900$
18. Taxable Social security benefit: 11900$
19. Taxes due on SSB: 1428

Calculation of tax with Capital Gain:

20. Other Taxable Income: 22200$
21. Long Term Capital Gain: 8000$
22. Taxable Pension: 16000$
23. Taxable Security benefits: 11900$
24. Adjusted Gross income: 58100$
25. Standard Deduction 12200$
26. Taxable Income : 45900$
27. Tax: 5536$

Calculation of tax without Capital Gain:

28. Other Taxable Income: 22200$
29. Taxable Pension: 16000$
30. Taxable Security benefits: 11900$
31. Adjusted Gross income: 50100$
32. Standard Deduction 12200$
33. Taxable Income : 37900$
34. Tax: 4537$

Ans 2. Difference due to no benefit of lower taxation on Long term Capital Gain: 5536$-4537$= 999$