Question

Sean, who is single, received social security benefits of $8,440, dividend income of $12,600, and interest income of $2,110. 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 $10,220, a reduction in future dividends of $1,055, and an increase in future interest income of $1,555. What amount of social security benefits is taxable to Sean?

Answer 1

If sean does not sell the stock his adjusted gross income will be $ 1,555. Note that none of his social security benefits are taxed

If sean sells the stock, a portion of his social security benefits would be taxed in 2018.

His provisional income would be:

Dividend income	12,600
Interest income	2,110
Gain on sale of stock	10,220
One half social security benefits	4,220
Provisional income	29,150

Because his 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 $2,110.

Thus, 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 benefit 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 $5,110 gain in 2018 , which would not cause any social security benefits to be taxed because his provisional income would be $24,050. In 2019 , if his social benefits remain at $8,44o, his dividend income is $11600(12600-1000) and his interest income is $3,666(2,110+1,555), then the taxable social security benefit would be $0(you may find it instructive to perform this calculation yourself). By taking this approach, sean's taxable income would be lower over the two year compared to taking the entire gain in 2018.