Do Capital Gains Count as Income for Social Security? + FAQs

Confused about whether your capital gains count as income for Social Security? You’re not alone.

Many retirees and investors wonder if profits from selling stocks, real estate, or other assets might affect their Social Security benefits. 💰 Capital gains can significantly boost your income on paper—so could it reduce your Social Security payments or change how they are taxed? 

The Surprising Answer: Do Capital Gains Count as Income for Social Security?

Here’s the quick answer: Capital gains do not count as “earned income” for Social Security benefits. This means profits from selling investments are not considered income when the Social Security Administration calculates your retirement or disability benefits.

Whether you made $1,000 or $100,000 in capital gains last year, it won’t increase your Social Security benefit amount and won’t reduce your benefit due to earnings limits (more on those limits shortly). Social Security primarily looks at earnings from work (wages or self-employment income) when determining your benefits and when applying any early-retirement earnings penalty.

In short: Capital gains are unearned income, so they don’t count towards Social Security benefit calculations or the earnings test that can reduce benefits if you claim early.

However—and this is where it gets a bit tricky—capital gains can count as income for tax purposes, which may indirectly affect your Social Security. The IRS considers capital gains as part of your taxable income, so large capital gains can push up your total income and potentially cause a portion of your Social Security benefits to become taxable. Under federal law, if your “combined income” (a tax term explained later) exceeds certain thresholds, up to 85% of your Social Security benefits could be subject to federal income tax. In that sense, while capital gains don’t affect the amount Social Security pays you, they could affect how much of your benefits you get to keep after taxes.

So, federally:

• Benefit amount & eligibility: Capital gains are not counted. Only work income counts for earning credits, calculating benefits, or the earnings test if you take benefits early.
• Taxes on benefits: Capital gains are counted in determining if your Social Security benefits are taxable by the IRS. The more income (including capital gains) you have, the more likely you’ll pay tax on your benefits (up to the 85% limit).
• No Social Security payroll tax on capital gains: You do not pay Social Security (FICA) taxes on capital gains like you do on wages. That means capital gains won’t increase your future benefits.

In summary, capital gains won’t increase or decrease the Social Security benefits you receive from the SSA, but they can affect your tax bill on those benefits. Next, let’s make sure you avoid some common pitfalls people run into with this topic.

🚫 Avoid These Costly Mistakes (Common Social Security & Capital Gains Misconceptions)

When it comes to Social Security and investment income, it’s easy to get tripped up. Here are some common mistakes and misconceptions to avoid:

• Mistake #1: Thinking Any Income Reduces Your Social Security Check.
  Many people worry that if they have any extra income in retirement—like stock profits or rental income—their Social Security benefits will shrink. This is not true. Social Security only reduces your benefits before full retirement age if you have earned income from a job or self-employment above certain limits. Investment income (capital gains, dividends, interest, etc.) does not count against these earnings limits.** So, selling stocks or a house at a gain won’t cause Social Security to withhold part of your check under the earnings test rules. (We’ll cover the earnings test thresholds shortly.)

• Mistake #2: Assuming Capital Gains Boost Your Future Social Security Benefits.
  Some investors hope that reporting big capital gains on their tax return will lead to higher Social Security benefits down the road. In reality, Social Security benefits are based only on wages or self-employment income on which you paid Social Security payroll taxes. No matter how large your capital gains, they won’t earn you extra Social Security credits or increase your benefit. For example, if you sell a rental property for a $50,000 profit, you might owe income taxes, but you won’t get a higher Social Security check because of that sale. Don’t bank on investments to pad your Social Security—only a higher salary or self-employment profit (up to the annual Social Security wage cap) can do that.

• Mistake #3: Ignoring the Tax Impact on Your Benefits.
  While capital gains won’t reduce your gross Social Security benefit, failing to plan for the tax impact is a common mistake. Big capital gains can push your income over the IRS thresholds that make Social Security benefits taxable. Imagine joyfully cashing out stock for a profit, only to find at tax time that a chunk of your Social Security is now taxable (meaning a higher IRS bill) 😱. To avoid surprises, be aware of the tax brackets and consider strategies like spreading sales over multiple years or using tax-advantaged accounts if you’re trying to minimize taxes on your benefits.

• Mistake #4: Overlooking Medicare Costs (IRMAA).
  Here’s a gotcha many don’t realize: Capital gains can also affect your Medicare premiums. If you have a large capital gain, it raises your modified adjusted gross income, which Medicare uses to set your Part B and Part D premiums. This is known as IRMAA (Income-Related Monthly Adjustment Amount). For example, a big one-time stock sale could bump you into a higher income bracket and lead to higher Medicare premiums a couple of years later (since Medicare looks at your tax return from two years prior). This isn’t directly about Social Security benefits, but it’s a related retirement income pitfall to avoid. Plan big asset sales carefully to avoid unwelcome Medicare cost surprises.

• Mistake #5: Forgetting State Taxes and Rules.
  Federal rules are one thing, but don’t forget about your state. States have their own tax laws—some tax Social Security benefits, many don’t; some tax capital gains lightly, others heavily. It’s a mistake to assume your state follows the federal treatment. We’ll dive into a state-by-state breakdown later, but remember that where you live can affect your after-tax outcome. For instance, if you move from Florida (which has no state income tax) to Colorado, you might suddenly find a portion of your Social Security or retirement income taxed at the state level. Always check your state’s rules before making big financial moves.

By sidestepping these mistakes, you’ll be in a much better position to maximize your Social Security and investment income. Now, let’s get clear on the terminology—because understanding the key terms is half the battle.

🔑 Key Terms Explained: Earned Income, Investment Income & More

Navigating Social Security and tax rules means wading through a lot of jargon. Let’s break down some key terms in plain English:

• Earned Income: This is money you make from working, either for an employer (wages, salary, bonuses, tips) or through self-employment (business or freelance income). Only earned income counts toward Social Security benefit calculations. It’s also the type of income subject to Social Security payroll taxes. If you’re still working, the Social Security Administration tracks your earned income each year (up to a yearly cap) to determine your future benefits.

• Unearned Income: Any income not earned from work. This includes investment income (like interest, dividends, and capital gains), rental income, pensions, annuities, and inheritances. Unearned income is not subject to Social Security payroll taxes and does not count toward the earnings test for Social Security benefits. However, unearned income can be subject to income taxes and can affect other calculations (like whether your Social Security benefits are taxable, as discussed).

• Capital Gains: A capital gain is the profit from selling an asset for more than you paid for it. This could be stocks, bonds, real estate, or other investments. There are two types:

  • Short-Term Capital Gains: Profits on assets held one year or less. These are taxed at your regular income tax rates (same as your wage income tax rate).
  • Long-Term Capital Gains: Profits on assets held more than one year. These get special tax rates (0%, 15%, or 20% at the federal level, depending on your total income). Long-term gains usually enjoy lower tax rates than regular income. Important: Neither short-term nor long-term capital gains are considered “earned income” for Social Security. They might raise your income tax bill, but they won’t trigger Social Security payroll taxes or count toward Social Security benefits.

• Taxable Income: This is the portion of your income that is subject to income tax after all deductions and exemptions. Capital gains (after any exclusions or deductions) add to your taxable income. Social Security benefits may also add to your taxable income if you have other income above certain levels (we’ll explain those levels soon).

• Provisional Income (Combined Income): This is a special calculation used by the IRS to determine if your Social Security benefits are taxable. Provisional income is essentially:

  Adjusted Gross Income (AGI) + nontaxable interest (like muni bond interest) + half of your Social Security benefits.

  Your AGI includes earnings, pensions, capital gains, dividends—basically all taxable income. So capital gains are part of this provisional income. If your provisional income exceeds $25,000 (single) or $32,000 (married filing jointly), a portion of your Social Security benefits becomes taxable. (Above $34,000 single/$44,000 joint, up to 85% of your benefits may be taxed.) This concept will come up when we talk about taxes on Social Security.

• Social Security Earnings Test (Retirement Earnings Limit): If you claim Social Security before reaching Full Retirement Age (FRA) and you continue to work, there’s a limit on how much you can earn from work without temporarily reducing your benefits. In 2024, for example, if you’re under FRA all year, you can earn up to $21,240 from wages or self-employment with no reduction. Earn above that, and SSA will withhold $1 of benefits for every $2 you earn over the limit. (The limit is higher in the year you reach FRA, and after you hit FRA, there’s no earnings test at all.) Crucially, this earnings test only applies to earned income. Money from investments, capital gains, pensions, etc., does not count toward these limits.

• Full Retirement Age (FRA): The age at which you qualify for your full Social Security retirement benefit (with no reductions for early claiming and no credits for delayed claiming). It’s around 66-67, depending on your birth year. After this age, the earnings test no longer applies—you can earn as much as you want from work and still get all your Social Security. Also, at FRA and beyond, many people are simply drawing down investments, and it’s useful to know those investment earnings won’t reduce benefits (though they could affect taxes, as noted).

• Social Security Payroll Tax (FICA and SECA): This is the tax on earned income that funds Social Security (and Medicare). If you’re an employee, 6.2% of your wages (up to an annual cap) goes to Social Security, and your employer pays another 6.2%. If you’re self-employed, you pay 12.4% (the combined amount) on your net earnings. Capital gains are not subject to Social Security payroll taxes. You might pay other taxes on capital gains (like federal capital gains tax, and a 3.8% net investment income tax if you’re high-income, plus any state tax), but you won’t pay FICA on those profits.

• Social Security Benefit Taxation: This refers to federal income taxes on your Social Security benefits. As mentioned under provisional income, depending on your total income, you may have to pay tax on 0%, 50%, or up to 85% of your benefits. This is separate from the Social Security system itself; it’s part of the IRS tax code. Capital gains factor into this because they increase your income. If your capital gains push you over the thresholds, more of your Social Security becomes taxable. (It’s worth noting that even at 85%, you never pay tax on more than 85% of your benefit—15% is always tax-free.)

Now that we’ve clarified these terms, let’s look at how all this plays out in real life with some examples.

💡 Real-Life Scenarios: How Capital Gains Affect Social Security Benefits

To really understand the interaction between capital gains and Social Security, let’s walk through a few different scenarios. These examples will illustrate what happens in situations that many retirees or investors might face.

Scenario 1: Early Retiree with Investment Income (Will Benefits Be Withheld?)

Meet Alice: She’s 63, retired from her career job, but started a small consulting gig and also sells some investments on the side. This year, Alice will earn $25,000 from consulting (earned income) and also realize $30,000 in long-term capital gains from selling some stocks. Alice claimed Social Security retirement benefits at 62, so she’s subject to the earnings test until she reaches her FRA (66 and 10 months in her case).

Will Alice’s Social Security benefits be reduced because of her income? Let’s break it down:

• Earned income: $25,000 from consulting. The 2024 earnings limit is $21,240. Alice is $3,760 over the limit. Social Security will withhold $1 for every $2 over the limit. That means $1,880 of her benefits would be temporarily withheld this year due to her consulting income.
• Capital gains: $30,000 from investments. This amount is not counted toward the earnings limit. Even though $30k is more than the limit, it doesn’t matter because it’s not earned income. If Alice had no consulting income, she could have $0 in wages and $1,000,000 in capital gains and Social Security would not withhold a dime of her benefits due to the earnings test.

So, in Scenario 1, Alice’s $30,000 capital gain does not reduce her Social Security checks at all. Only her earned income affects the check, causing that $1,880 withholding. Alice’s capital gains do, however, count as income on her tax return. When Alice files her taxes, that extra $30k might mean some of her Social Security benefits become taxable (depending on her total income). But the SSA itself doesn’t penalize her for investment income.

Key Takeaway: If you’re below Full Retirement Age and working while on Social Security, only work income counts toward the earnings limit. Investment income (capital gains, dividends, interest) won’t cause Social Security to withhold your benefits.

Scenario 2: Full Retirement Age or Older with Large Capital Gains (Tax Impact)

Meet Bob: He’s 68 (past his FRA), comfortably retired, and receiving Social Security. Bob no longer works, but he is an active investor. This year, Bob sold a vacation home and some stocks, realizing a capital gain of $100,000. His annual Social Security benefit is $30,000. He also has about $20,000 in other income (a pension and interest).

How do Bob’s capital gains affect him?

• Since Bob is over Full Retirement Age, there’s no earnings test to worry about. He could earn $0 or $1 million from a job, it wouldn’t reduce his Social Security benefits. And since capital gains aren’t earned income, even if he were younger, they wouldn’t count for the earnings test anyway.
• The real impact for Bob is on taxes. Let’s estimate Bob’s provisional income for determining Social Security benefit taxation:
  • Adjusted Gross Income (AGI) includes: $100,000 (capital gains) + $20,000 (pension & interest) = $120,000.
  • Half of Social Security benefits: half of $30,000 = $15,000.
  • Provisional income = $120,000 + $15,000 = $135,000. This is well above the highest threshold ($34,000 single / $44,000 married). So Bob will pay federal income tax on 85% of his Social Security benefits. Essentially, $25,500 of his $30,000 annual benefit will be considered taxable income. If Bob is in, say, the 15% marginal tax bracket for capital gains (which also applies to his ordinary income if he’s in a middle bracket), he’ll owe taxes on that $25,500 amount.
• In addition, Bob’s high income this year could subject him to the 3.8% Net Investment Income Tax on his capital gains (since single filers above $200k AGI pay this extra tax on investment income). And two years from now, Medicare will look at Bob’s 2025 tax return to set his 2027 premiums; that $135k income likely pushes Bob into a higher Medicare premium bracket (IRMAA surcharges).

Bottom line for Bob: His $100,000 capital gain did not reduce his Social Security benefit payments—he got his full $30k in benefits. But, it did make a large portion of those benefits taxable, resulting in a higher IRS bill, and it will trigger some other costs (like Medicare IRMAA). Bob might consider strategies like spreading sales across years or utilizing tax-free investments to manage his taxable income in retirement.

Key Takeaway: After you reach Full Retirement Age, no amount of earnings or capital gains will reduce your Social Security check, but high income (including capital gains) will increase how much of your Social Security is taxed, and can raise Medicare costs.

Scenario 3: Moderate Income Retiree with Capital Gains (Partial Taxation of Benefits)

Meet Carol and Dan: a married couple, both 70, both receiving Social Security. Together they get $40,000/year in Social Security benefits. They also withdraw from savings and occasionally sell investments. This year, they had $10,000 in long-term capital gains from selling some mutual fund shares. Other than that, they have minimal other income.

Will their $10,000 capital gain affect their Social Security?

• There’s no earnings test to worry about (they’re over FRA and not working).
• Let’s check the tax situation:
  • Adjusted Gross Income (AGI) includes the $10,000 capital gain (and not much else).
  • Half of their Social Security = $20,000.
  • Provisional income = $10,000 + $20,000 = $30,000. For a married couple, the base threshold is $32,000. Carol and Dan’s provisional income of $30k is below that. This means none of their Social Security benefits will be taxable for federal income tax purposes this year. If their capital gains had been higher, say $25,000 (making provisional income $45,000), then a portion of their Social Security (likely 50% of it up to the next threshold, then 85% of the rest) would become taxable. But at a $10k gain, they’re in the clear.
• So, Carol and Dan get to keep all their Social Security without any reduction, and they pay no federal tax on those benefits because their overall income remains modest even after including the gain. If they lived in a state that taxes Social Security (we’ll cover which states do), they’d have to see if their income is low enough to avoid state tax as well.

Bottom line: A relatively small capital gain in retirement often won’t trigger taxes on Social Security benefits, especially for a married couple, thanks to the higher joint threshold. Carol and Dan were able to take some profits from investments 💸 and still enjoy their Social Security tax-free.

Key Takeaway: Capital gains can be managed in retirement to keep your total income within certain thresholds. Small or moderate capital gains are unlikely to make your Social Security taxable if you’re otherwise low-to-middle income. But larger gains can push you into taxable territory—plan accordingly.

Scenario 4: Social Security Disability and Investment Income

Meet Ethan: He’s 55 and is receiving Social Security Disability Insurance (SSDI) due to a serious injury that prevents him from working. Ethan has investments from earlier in life. This year, he sold some of his holdings for a $5,000 capital gain to help pay bills.

Does Ethan’s capital gain jeopardize his SSDI benefits?

• SSDI has rules about work and earnings (Substantial Gainful Activity limits) to determine if you’re still considered disabled, but unearned income like investments doesn’t count against those limits. Ethan’s $5,000 capital gain has no effect on his eligibility for SSDI. He can continue to receive his disability checks.
• For taxes, SSDI is treated like Social Security for retirement. The same income thresholds apply to determine if benefits are taxable. If Ethan’s only income was SSDI (say $20,000/year) and a $5,000 gain, his provisional income would be $5,000 + $10,000 (half of SSDI) = $15,000. As a single filer, that’s below $25,000, so his SSDI benefits would not be taxed. The $5,000 gain itself might be taxed (depending on Ethan’s total deductions and tax bracket), but the disability benefits remain tax-free in this scenario.

Bottom line: Even if you’re receiving Social Security disability benefits, investment income like capital gains won’t reduce your check. Just be mindful of the tax implications and any impact on other programs (for example, if Ethan were receiving needs-based SSI, that would be a different story, but here we focus on SSDI which mirrors retirement benefits in how it’s treated).

These scenarios show a consistent pattern: Capital gains do not count as earned income for Social Security benefit calculations or withholding, but they do count as income for tax purposes. Next, let’s compare capital gains with other income sources and see how each can affect your Social Security differently.

📊 By the Numbers: Capital Gains vs. Other Income Sources (Evidence & Comparisons)

Is a dollar of capital gains “better” or “worse” for your Social Security than a dollar of wages? It depends on how you look at it. Let’s compare capital gains with other income types in the context of Social Security rules:

1. Social Security Payroll Taxes and Benefit Credits:

• Wages/Salary: Subject to Social Security tax (6.2% from you, 6.2% from employer, up to the annual wage base). These earnings count toward your future benefit. Higher wages = potentially higher Social Security benefits (up to the max).
• Self-Employment Income: Subject to self-employment tax (12.4% Social Security portion). Counts toward your benefit, just like wages.
• Capital Gains: Not subject to Social Security tax. Does not count toward your benefit. You keep more of the dollar now (no payroll tax cut), but it won’t help increase your monthly Social Security in the future.
• Pensions/Annuities: Not subject to Social Security tax (you paid in during your working years already). Do not count toward new Social Security credits or benefits.
• Rental Income: Not subject to Social Security tax unless you are a real estate professional by trade. Generally considered unearned for Social Security purposes.
• Interest/Dividends: Not subject to Social Security tax. No impact on benefits.

Takeaway: If you want to maximize your Social Security benefits, earned income is the only game in town. Investment income (capital gains, etc.) won’t boost your future benefit—though it might boost your immediate net income since it isn’t taxed for Social Security.

2. Early Retirement Earnings Test:

• Wages/Salary: Counts against the earnings limit if you’re under FRA and have started benefits. If you earn above the limit ($21,240 for 2024), your benefits are reduced as described earlier.
• Self-Employment Income: Counts against the earnings limit (based on net profit).
• Capital Gains: Do not count against the limit.
• Interest/Dividends/Pensions: Do not count against the limit.

Takeaway: Only work income triggers the earnings test. Retirees under 67 who fear losing benefits can rest easy about their investments—their portfolio can grow and be tapped without cutting Social Security payments.

3. Income Taxes on Social Security Benefits:

• Wages/Self-Employment: Add to your AGI and provisional income. Can cause up to 50% or 85% of your benefits to become taxable if you cross the thresholds.
• Capital Gains: Also add to your AGI. Equally capable of making your benefits taxable. For example, a $20,000 capital gain has the same effect on benefit taxation as a $20,000 salary in terms of provisional income.
• Pensions: Add to AGI, count toward making benefits taxable.
• Tax-Exempt Interest: Not in AGI, but it is added back for provisional income calculation. So even municipal bond interest can push you over the line for SS taxation.
• Roth IRA Withdrawals: Not taxed and not included in provisional income. (One reason Roth accounts can be great in retirement—you can take money out without bumping up your Social Security taxation or Medicare premiums.)

Takeaway: For tax purposes, a dollar of capital gains is similar to a dollar of other income (like wages or pension) when calculating if your Social Security is taxable. The key is your total combined income. The IRS doesn’t care if it was from a job or an investment when determining if benefits get taxed.

4. Medicare Impacts (IRMAA and NIIT):

• Wages/Self-Employment: Can trigger IRMAA surcharges on Medicare if high enough (e.g., a high salary will raise your AGI). Wages are not subject to the 3.8% Net Investment Income Tax, though high earners do pay an extra 0.9% Medicare payroll tax on wages above certain thresholds.
• Capital Gains: Can definitely trigger IRMAA since they raise AGI. Also, if your AGI is over $200k single/$250k married, capital gains (and other investment income) above that threshold are hit with the 3.8% Net Investment Income Tax. So very large capital gains have an extra tax layer for high earners, separate from payroll tax.
• Pensions/Other Income: Add to AGI, so they can also trigger IRMAA if large.
• No Income/Low Income: If you keep income low, you avoid IRMAA and your Medicare B/D premiums stay at the base level.

Takeaway: While not directly a Social Security issue, it’s worth noting that both work income and investment income can raise your Medicare costs if you’re high-income. Capital gains are subject to a special investment tax for the wealthy, whereas wages have their own extra Medicare tax for high earners.

Let’s visualize some of these differences in a quick reference table:

As you can see, capital gains stand out as being excluded from Social Security benefit calculations and the earnings test, just like other unearned income, but they do count toward taxable income. So for Social Security purposes, capital gains give you extra money without reducing your benefits—but the tax man may take a share depending on your overall income.

Now that we’ve covered the federal landscape, let’s turn to the state level, as laws can vary significantly across state lines.

🗺️ State-by-State Nuances: Capital Gains and Social Security Across the U.S.

Social Security is a federal program, so the rules about what counts as income for calculating benefits are the same in every state. No state can decide that capital gains will count toward your Social Security earnings record or benefit formula—those are set by federal law. However, states do have a say in how your benefits and investment income are taxed at the state level. This means where you live can affect how much of your Social Security and capital gains you get to keep after state taxes.

Let’s break down the state nuances in two parts: taxation of Social Security benefits and taxation of capital gains.

State Taxation of Social Security Benefits: 50-State Overview

The good news for retirees is that most states do not tax Social Security benefits at all. But there are some differences:

• States with No Income Tax (No Tax on Social Security): 🏝️
  If you live in a state with no personal income tax, you won’t pay state tax on Social Security (or on any other income, for that matter). These states are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Additionally, Tennessee and New Hampshire do not tax wages or Social Security (TN used to tax investment income but phased that out; NH currently taxes only interest and dividends, not general income or Social Security). In short, in these states, your Social Security benefits and capital gains are both free from state income tax.

• States That Fully Exempt Social Security: 🎉
  These states have an income tax, but they specifically exempt Social Security benefits from taxation, regardless of your income. They include: Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia, West Virginia, and Wisconsin, plus the District of Columbia. If you live in one of these places, you will not pay state income tax on your Social Security benefits. (Some of these states also have other breaks for retirees, like not taxing pensions or offering exclusions, but Social Security is fully off the table here.)

• States with Partial Taxation of Social Security: 🔍
  A handful of states tax Social Security benefits only for higher-income retirees or offer credits/deductions that offset some of the tax. Each has its own twist:

  • Colorado: Allows a sizable pension and annuity exclusion for folks age 55+, which covers Social Security benefits as well. Essentially, most or all of your Social Security can be excluded from taxation, especially if it’s your only income.
  • Connecticut: Excludes Social Security for single filers with AGI less than $75,000 and joint filers with AGI less than $100,000. Above those incomes, Social Security may be taxed by CT (up to the same extent as federal, i.e., max 85% inclusion).
  • Kansas: Exempts Social Security benefits completely for AGI $75,000 or less (regardless of filing status). If your income is under that threshold, you pay no KS tax on benefits; above it, you might.
  • Minnesota: Has its own Social Security subtraction that kicks in for incomes below certain levels (around $81k single / $104k joint for full or partial subtraction). Higher incomes may pay some MN tax on Social Security.
  • Missouri: Provides a full exemption for Social Security if you’re 62+ and your income is below $85,000 (single) or $100,000 (joint). Above those, the exemption phases out.
  • Montana: Taxes Social Security similar to the federal method, but with a twist—there’s a worksheet to determine taxable amount. They don’t have specific exemptions; effectively, many will pay some MT tax on benefits unless income is very low.
  • Nebraska: Recently changed to reduce taxation: Single filers with AGI up to $43,000 and joint up to $58,000 can exclude Social Security. Above that, Nebraska had followed federal rules, though further reductions are in the works.
  • North Dakota: Allows an exclusion of taxable Social Security benefits for AGI less than $50,000 (single) or $100,000 (joint). If you’re under those caps, no ND tax on Social Security; otherwise, ND used to tax like federal (but ND’s income tax rates are low and they’ve been cutting them).
  • Rhode Island: Exempts Social Security for those who have reached full retirement age and have AGI below about $82,000 (single) or $102,000 (joint). Above that, Rhode Island taxes benefits per federal rules.
  • Utah: Up until 2020, Utah taxed Social Security the same as the feds (up to 85% taxable). However, Utah introduced a retirement tax credit that includes Social Security, which effectively can eliminate taxes on Social Security for middle-income retirees; higher incomes might still pay some state tax on benefits, akin to the federal inclusion.
  • Vermont: Taxes Social Security but recently implemented an income-based exclusion for lower incomes (below ~$34k single / $44k joint you get a full or partial break). Above those, VT taxes benefits like federal.
  • West Virginia: Used to tax Social Security, but they’ve been phasing it out. As of recent years, if you’re under $50k single / $100k joint, your benefits are exempt in WV. By 2022, WV fully exempted Social Security for most residents under those thresholds.

  In these partial-tax states, moderate to high-income retirees might pay some state tax on Social Security, whereas lower-income retirees typically won’t. It’s all about where your income falls relative to their cut-offs.

• States Fully Taxing Social Security: 😧
  Good news: No state fully taxes Social Security without any exemptions or credits. Even in the states above, there’s at least some relief either by income level, age, or a credit. New Mexico comes closest to treating Social Security like regular income (with a deduction that can cover some of it), but even they allow a retirement income exemption that can reduce the hit. So, no state is outright taxing 100% of everyone’s benefits with no relief.

Why does this matter for capital gains? Because if you’re in a state that taxes Social Security benefits based on your total income, capital gains could push you into or out of owing state tax on your benefits, similar to the federal situation. For example, in Connecticut, if a big capital gain raises your AGI from $70k to $80k, you might go from no tax on Social Security to having to pay CT tax on a portion of it.

State Taxation of Capital Gains:

States also vary on how they tax capital gains:

• Most states with an income tax will tax capital gains as part of your income, generally at the same rate as other income. There are exceptions and special rules:
  • No Income Tax States: As mentioned, AK, FL, NV, SD, TX, WA, WY (and effectively TN and NH on capital gains) have no state tax on capital gains. This can be a huge benefit if you have large investment profits.
  • Special Capital Gains Breaks: Some states offer special exclusions or deductions for capital gains:
    • Arkansas: Allows 50% of long-term capital gains to be excluded from state income, and once had an exemption for very large gains. (So, effectively, AR can tax long-term gains at half the normal rate.)
    • New Mexico: Offers a capital gains deduction (up to a certain amount, or 50% of gains, whichever is smaller), which can reduce state tax on those gains.
    • Colorado: No special capital gains rate now for most investments (it used to have one long ago), but CO’s flat tax rate is relatively low, and seniors can use the pension exclusion for retirement income.
    • Montana: Provides a credit equal to 2% of capital gains income, effectively lowering the tax rate on capital gains by 2 percentage points.
    • North Dakota: Taxes long-term capital gains at effectively 40% of the normal rate (60% exclusion for long-term gains from certain sales).
    • Arizona, Illinois, etc.: Generally treat capital gains like ordinary income with no special break (but their overall tax rates might be lower).
    • California: Taxes all income, including capital gains, at the same progressive rates (which are high for big earners, up to 13.3%). No special cap gains rate break there.
    • Pennsylvania: Taxes capital gains at a flat 3.07%, same as any other income, which is relatively low.
    • New York: Taxes capital gains at regular income tax rates (up to 8.82%).
    • And so on for other states.

What about how states treat capital gains relative to Social Security? No state counts capital gains as “earned income” for any Social Security calculation (since Social Security calcs are federal), but for state tax on Social Security, capital gains can boost your income and potentially subject your benefits to state tax in those states with income-based exemptions as explained.

Here’s a quick reference of all 50 states and how they handle Social Security benefits and capital gains taxes:

(Rates and rules are as of recent years and may change; check your state’s current tax laws.)

This table shows that while Social Security benefits are largely not taxed at the state level, capital gains generally are (except in states without income tax). Some states have special reduced rates or exclusions for capital gains to encourage investment.

Key Takeaways on State Nuances:

• No state changes the fundamental Social Security rules—capital gains won’t count as work income for SSA purposes anywhere.
• The main differences are in taxation: where you live can impact whether you pay state tax on Social Security and how much you pay on capital gains.
• If you’re considering relocating for retirement, look at both state income tax on Social Security and overall tax on retirement income (including investments). For instance, Florida and Nevada will tax neither; Colorado won’t tax SS for most, but will tax capital gains at 4.4%; Minnesota might tax a portion of your SS if you have higher income and will tax capital gains at up to 9.85%. Such differences can add up.

Now that we’ve covered everything from federal rules to state-by-state details, let’s answer some frequently asked questions that people often have on this topic.

📖 FAQs: Capital Gains and Social Security

Q: Do I pay Social Security tax on capital gains?
A: No. Capital gains are not subject to Social Security (FICA) payroll taxes, so you do not pay Social Security tax on investment profits.

Q: Will capital gains reduce my Social Security retirement benefits?
A: No. Capital gains have no effect on your Social Security benefit amount, even if you take benefits early; only earned income from a job can cause benefit reductions.

Q: Do capital gains count as earned income for Social Security?
A: No. Capital gains are considered unearned income. They do not count as earned income for Social Security benefit calculations or earnings limits.

Q: Can a large capital gain make my Social Security benefits taxable?
A: Yes. A big capital gain can raise your total income above IRS thresholds, causing up to 85% of your Social Security benefits to become taxable income.

Q: Should I report capital gains to the Social Security Administration?
A: No. You report capital gains on your income tax return to the IRS. You do not need to report investment profits to Social Security for benefit purposes.

Q: Will selling my house or stocks increase my Social Security benefits?
A: No. Selling assets for a gain won’t increase your Social Security benefits. Benefits are based only on work earnings averaged over your top 35 working years.

Q: Do states count capital gains as income when taxing Social Security?
A: Yes. If your state taxes Social Security based on income level, capital gains will raise your income. This can push you into taxable range for state (or federal) taxes on benefits.

Q: Are IRA or 401(k) withdrawals considered income for Social Security?
A: No. Withdrawals from retirement accounts are not treated as earned income by Social Security. They can make your benefits taxable, but won’t reduce or increase your benefit amount.

Q: Does investment income affect Social Security Disability (SSDI)?
A: No. Unearned income like investments or capital gains won’t affect SSDI benefits. Only work income (earned income) can impact SSDI eligibility or amounts.

Q: Will a capital loss (losing money on investments) impact my Social Security?
A: No. Capital losses do not affect your Social Security benefits or the earnings test. They may reduce your taxable income, potentially lowering taxes on your benefits.