An American retiree gained $40,000 in stock profits, and while enjoying a 0% capital gains tax rate, this led to 85% of their Social Security benefits becoming taxable, ultimately resulting in a federal tax bill of approximately $635.
This case shows that even if the long-term capital gains tax rate is 0%, the gains are still included in "combined income," which may lead to an increase in the taxable portion of Social Security benefits. The IRS stipulates that Social Security benefits begin to be taxable for single filers once their combined income exceeds $25,000, and up to 85% can be taxable once it exceeds $34,000. Experts advise retirees to calculate their combined income before selling stocks to avoid unexpected tax burdens.
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