Allworth Advice | Pensions and Social Security's annual 'earnings limit'

Question: Tom in Loveland: I’m 66, retired, and currently receiving Social Security benefits. But I just found out I have a small pension coming my way. Will this affect my Social Security in any way since my income will now be higher?

Answer: We’re assuming you’re concerned about exceeding Social Security’s annual “earnings limit” and having $1 withheld for every $2 you earn above that limit. The good news is that this limit is determined by “earned” income only (i.e., anything that would be included on a W-2 tax form) – and a pension does not count as earned income since it’s technically retirement income.

However, there’s something else to consider as well. If this pension is from a private employer, you can receive your full pension amount and Social Security benefit without penalty. On the other hand, if your pension is from a public employer that did not withhold FICA taxes, you’ll probably run into something called WEP, or the “Windfall Elimination Provision.” This will reduce your Social Security benefit, and the impact can vary since the formula is pretty complex. (A similar rule called the “Government Pension Offset,” or GPO, applies to spousal or survivor Social Security benefits). The government put these rules in place in 1983 to prevent “double dipping” by getting a public pension and Social Security benefits.

The Allworth Advice is that a private pension has no effect on Social Security benefits, but a public pension can. If you have questions about the WEP or GPO, visit the Social Security website or seek the guidance of a fiduciary financial advisor. We should also note that depending on your “provisional income” once you factor in your pension, your Social Security benefit could potentially be subject to taxes.

Q: Kevin and Laura in Villa Hills: We’re selling our house and hoping to sell it for about $300,000 more than what we bought it for. What sort of tax implications will there be?

A: We have good news for you! The IRS allows married couples who file their taxes jointly to exclude up to $500,000 of capital gains when selling a home. So, if we assume you’re married and file jointly, you will owe no taxes since your $300,000 in profit comes in under that threshold. (Note: The exclusion is $250,000 for single filers

Of course, there are some criteria that need to be met to qualify for this exclusion: You need to have owned the house for two of the last five years; this house must be considered your primary residence for at least two of the last five years; and you can’t have already used the exclusion within the last two years.

But let’s just say you meet all the criteria and end up getting even more than you were hoping. What then? If, for example, you sell your home for $600,000 more than your original purchase price, that’s $100,000 over the $500,000 exclusion limit. In this case, you would owe capital gains on the $100,000 (not the full $600,000 in profit). Capital gains rates currently sit at 0%, 15%, and 20 %, depending on your taxable income.

Here's the Allworth Advice: If this is your main home that you’ve lived in for at least the last few years, figuring out the taxes (or lack thereof) when you sell can be pretty simple. But, as always, there can exceptions and loopholes – especially if you don’t meet the above criteria. You should reach out to a trusted tax professional if you have additional questions.

Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend, or someone in your family has a money issue or problem, feel free to send those questions to yourmoney@enquirer.com.

Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Visit allworthfinancial.com or call 513-469-7500.

This article originally appeared on Cincinnati Enquirer: Will a pension affect my Social Security?