tSocial Security update: The customary annual increase in the ceiling on outside earnings for recipients of Social Security benefits will take effect Jan. 1.
If you are under 65, you will be permitted to earn $4,080 in 1981 (up from $3,700 this year) without any reduction in Social Security payments. For those 65 or older the ceiling increases from $5,000 to $5,500.
Benefits will be reduced one dollar for each two dollars earned in excess of the ceiling. But only "earned income" -- salary or wages, tips and net income from self-employment -- is counted.
Unearned income like interest, dividends and pension payments is not considered. Rental income also is excluded unless you devote a substantial amount of time to managing your property and therefore are considered to be in the realty business.
There is no earnings offset for anyone who is 72 or older, and beginning in 1982 the ceiling on earned income will be removed for Social Security recipients who have reached the age of 70.
While we're on the subject, if you're still working, Social Security taxes will cost you (and your employer) more next year. Starting with your first paycheck after Jan. 1, the tax rate goes up from the current 6.13 percent to 6.65 percent. For the self-employed the rate raises from 8.1 percent to 8.35 percent.
In addition, the cap on earnings subject to tax goes up, also. You will have to pay Social Security tax until your earnings reach $29,700, compared with $25,900 this year.
And the amount of earnings required to qualify for four quarters of coverage increases from $1,160 to $1,240 (or $310 a quarter).
Question: I am 64 and must retire for physical reasons. My Social Security will be small, and the only other source of income will be from stocks which I have painfully accumulated during the last 25 years. If I sell these stocks to invest the money for a better yield now, is there any way to lessen the capital gains tax ?
Answer: There are a couple of things you can do to try to reduce the tax bite. Most important, wait until 1981 before you sell any of the stock.
In the first place, since you're retiring in 1980 and won't have any wages next year, and since Social Security benefits aren't taxable, you will be in a lower tax bracket in 1981 than in 1980.
Second, since you'll reach the age of 65 next year, you'll have an additional personal exemption, which also should help you to drop into a lower tax bracket.
And finally, all the signs point to some kind of a tax reduction bill next year, and there is at least a reasonable possibility that it will include a reduction in the capital gains tax.
Caveat: If you believe that the market (or, more specifically, your stocks) will suffer a substantial setback before the end of this year -- perhaps enough to wipe out the potential tax savings -- then you may want to sell this year anyway.
Another option: You can lighten the tax burden by spreading the sales over two or more years. If you can hang on for a while, sell the stocks producing the lowest income first and the higher-yielding shares later.
If you have a capital loss in any of the stocks, remember that you can offset losses by an equivalent amount of gains without generating any tax liability.
Q: Some time ago there was mention of an exemption on the first $200 of interest or dividends for 1981 and 1982. Has this been made into law by Congress ?
A: Yes. For both the 1981 and 1982 tax years the present $100 exclusion of dividend income will go to $200, and will be expanded to include interest income, as well.
That $200 will apply to each taxpayer, so the exclusion will amount to $400 on a joint return. And another change: The full $400 exclusion will be available on a joint return regardless of the ownership of the assets generating the income.
Caution: Even though you will be completing your 1980 return in 1981, remember that the old exclusion still applies to 1980 tax returns. The increased exclusion will be effective with the 1981 return -- the one you'll be working on in 1982.