Question

Sean, who is single, received social security benefits of $8,200, dividend income of $12,540, and interest income of $2,050. Except as noted, those income items are reasonably consistent from year to year. At the end of 2018, Sean is considering selling stock that would result in an immediate gain of $10,100, a reduction in future dividends of $1,025, and an increase in future interest income of $1,525. What amount of social security benefits is taxable to Sean?

Amount of Taxable Social Security Benefits

Retain Stock$0

Sell Stock

Answer 1

Answer 1)

The amount of taxable social security benefits is equal to the lesser of (a) 85% of the benefits or (b) 85% of the excess of provisional income over $44,000 plus the lesser of (1) $6,000 or (2) 50% of benefits. Therefore as per this provision the amount of taxable social security for Sean would be $4,100 (this is 50% of the social security received)

Answer 2) Should Sean retain the stock ?

In case if Sean retain the stock then only the dividend income and Interest income would be taxable which is the adjusted gross income over here, and that would amount to $14,590. This is to be noted that none of his social security benefits are taxed.

Answer 3) If Sean wants to sell his stock.

If Sean sells the stock, then a portion of his social security benefits would be taxed in 2018. His provisional income would be

Calculation of provision income for Sean:-

Dividend income                                     $12,540

Interest income                                         $2,050

Gain on sale of stock                               $10,100

One-half social security benefits               $4,100

Provisional Income (Total of above)          $28,790    

Since, Sean’s provisional income exceeds the lower limit, his social security benefits will be taxed to the extent of the lesser of (a) 50% of the benefits or (b) 50% of the excess of provisional income over $25,000. In this case, the taxable amount would be $1,895.

Hence, it can be concluded that because the stock sale would push Sean over the provisional income limitation, a portion of his social security benefits would be taxed. If the sale were not made, none of the social security benefits would be taxed.

Since this sale opportunity is at the end of the year, Sean should consider selling half the stock in 2018 and the other half on the first available trade date in 2019. By doing this, Sean would record a $5,050 gain in 2018, which would not cause any social security benefits to be taxed because his provisional income would be $23,740. In 2012, if his social security benefits remain at $8,200, his dividend income is $11,515 ($12,540 - $1,025), and his interest income is $3,575 ($2,050 + $1,525), then the taxable social security benefits would be “zero”