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Eminent domain awards for land generally do not trigger Social Security withholding
The IRS taxes condemnation as gain over the property’s adjusted basis, and recognized gain can affect whether up to 85.0% of Social Security benefits become taxable.
A Social Security earnings-test concern around eminent domain payments may be misplaced, according to analysis published by Yahoo Finance, because Social Security does not treat condemnation awards as earned income subject to the withholding rules.
Yahoo Finance notes that the earnings test applies to beneficiaries who claim before full retirement age, but it only considers wages and net earnings from self-employment. It does not factor in investment income, interest, pensions, annuities, or capital gains when applying the earnings test.
In contrast, the IRS looks closely at the tax treatment of the condemnation proceeds, Yahoo Finance reports, distinguishing between net proceeds and the property’s adjusted basis. If net condemnation proceeds exceed the adjusted basis, the owner recognizes gain that can lead to taxable outcomes, including potentially increasing the portion of Social Security benefits that becomes taxable at the up to-85.0% level.
The analysis also points to future Medicare cost implications, stating that recognition of condemnation gain at age 63 can raise Medicare Part B and Part D premiums at 65 because Medicare uses income from two years prior.