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Author: billjam Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121182  
Subject: Re: Tax on Social Security & Capital Gains Date: 2/27/2014 4:47 PM
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If taxes were fair hedge fund managers would pay ordinary income tax rates instead of getting the carried-interest break.

But you are correct, until you hit the 85% top on SS, your long term capital gains are taxed indirectly because they make more SS taxable. But the capital gains aren't taxed themselves if you are in the lowest two tax brackets. Now if you had additional income from interest, wages, etc. you would pay tax on both that income and more of your SS.

Running an example through the spreadsheet I use for estimating my taxes I get this result. Add $1000 LTCG and my tax goes up $128. Alternatively, add $1000 interest income and my tax goes up $278. I prefer the LTCG.

Since you mentioned fairness, consider that the income limits orginally set when SS benefits became taxable were intended to tax only those with high incomes other than SS. Because Congress didn't index those limits, and has never revised them, almost everyone with enough income to survive in retirement now pays tax on their SS benefits. Most everyone knows this isn't fair but Congress will never fix it because they don't want to give up the tax revenue. Or at least not the tax revenue from middle income taxpayers. Some in Congress have no problem giving big tax breaks to the wealthy who fund their campaigns.
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