Does Passive Income Affect Social Security Benefits? - Winkler Kurtz LLP (2024)

FAQs

Does Passive Income Affect Social Security Benefits? - Winkler Kurtz LLP? ›

Winkler Kurtz – Long Island Attorney

When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net earnings if you're self-employed. We include bonuses, commissions, and vacation pay.

Rental income you receive from real estate does not count for Social Security purposes unless: You receive rental income in the course of your trade or business as a real estate dealer (see §§1214-1215); Services are rendered primarily for the convenience of the occupant of the premises (see §1218); or.

Passive income is generally subject to different tax rules than ordinary income. For example, passive income may be subject to a lower tax rate, and losses from passive income activities can only offset other passive income rather than ordinary income.

Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. They do not lower your Social Security retirement benefits. See What Income Is Included in Your Social Security Record for more information.

We'll have to reduce your benefits, however, if your earnings exceed certain limits for the months before you reach your full retirement age. If you work, but start receiving benefits before full retirement age, we deduct $1 in benefits for every $2 in earnings you have above the annual limit.

For the earnings limit, the SSA does not count income from other government benefits, investment earnings, interest, annuities and capital gains. However, it does count an employee's contribution to a pension or a retirement plan if the amount is included in the employee's gross wages.

Since passive income is money earned that is not related to a work activity or your ability to perform it, most forms will not be taken into account by the SSA when they are determining your eligibility or the amount of monthly benefit you are entitled to receive.

The IRS considers a rental activity to be passive if real estate is used by tenants and rental income (or expected rental income) is received mainly for the use of the property. In other words, owning a rental property and collecting rental income is considered passive and not active in most cases.

Only earned income, your wages, or net income from self-employment is covered by Social Security.

What does the government consider passive income? ›

Gross income from passive sources includes: Dividends, interest, and annuities. Royalties (including overriding royalties), whether measured by production or by gross or taxable income from the property.

Passive Income and Taxation

Short-term capital gains are taxed at your ordinary income tax rate. Long-term capital gains and qualified dividends are taxed at either 0%, 15%, or 20%, based upon your annual taxable income and filing status.

By keeping assets in tax-deferred accounts like IRAs and 401(k) plans, you won't have to pay tax on your income and gains until you withdraw the money from the account. In the case of a Roth IRA, you may never have to pay tax on your distributions at all.

If you are full retirement age and earning money, no worries. You're good to go, no penalties involved. However, if you are younger than full retirement age and make more than the yearly earnings limit, which for 2024 is $22,320, the Social Security Administration (SSA) reduces your benefit.

The Social Security five-year rule is the time period in which you can file for an expedited reinstatement after your Social Security disability benefits have been terminated completely due to work.

Furthermore, capital gains are not included in the income that Social Security uses to calculate the threshold. Also excluded are investment income, pensions, retirement account withdrawals, interest, and dividends.

Unearned income we do not count. (a) General. While we must know the source and amount of all of your unearned income for SSI, we do not count all of it to determine your eligibility and benefit amount. We first exclude income as authorized by other Federal laws (see paragraph (b) of this section).

Social Security will take into consideration the amount of your assets, because it is a needs-based program. To be eligible for SSI, your assets must be less than $2,000 for an individual and less than $3,000 for a married couple.

Passive income does not directly affect Social Security benefits from a legal perspective. However, it can have indirect implications through income taxation and potential impacts on eligibility for other government programs.

Self-employed individuals earn Social Security work credits the same way employees do and qualify for benefits based on their work credits and earnings. However, self-employed workers pay the full 12.4% tax rate where those employed by others pay only 6.2%.