The following question was submitted on my contact page: "Me and my wife are retired. Our financial advisor is recommending we sell a stock that has a gain of about $10,000. He says because of our low income it won't be taxed. is that correct?". Like so many things with taxes the answer is, "It depends on other income". I replied back that I needed to know what their other income was.
They told me he was receiving $2,768 gross per month in Social Security and his wife was receiving $1,834. He is also taking $3,000 monthly distributions from his IRA. He also said they were getting about $800 per year interest on their savings. I plugged this into my Tax Acuity software and determined that only $23,350 of their Social Security will be included in their Adjusted Gross Income. After taking the standard deduction of $27,800 for a joint couple over 65 years, their taxable income equals $32,350. Because their taxable income is well under the $80,000 limit their advisor is correct that the capital gain will not be taxed - specifically it will be taxed at a 0% rate. However, the gain will still increase their tax liability.
While the gain is not taxed, it is included in Adjusted Gross Income, which increases the amount of their Social Security that will be taxed. The amount of their Social Security that will be taxed increases by $8,500, from $23,350 to $31,850. This increases taxable income by the same $8,500, which is then taxed at their 12% bracket rate, resulting in additional federal tax of $1,020. They didn't tell me what state they live in but, if they live in Colorado (my home state) they also would have had $637 in additional state income taxes due.
While the advice to sell the stock may be a sound recommendation, the tax consequences should be factored into the decision. If this couple ignored the taxes attributable to the gain, they would have $1,020 due at tax time and most likely a small penalty on the underpayment.
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