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MONTHLY TAX NEWSLETTER - NOVEMBER 2000

An index and links to our previous months' newsletters can be found at oldnews.html


SOCIAL SECURITY MAX INCREASED TO $80,400 FOR 2001

Each year, the government raises the maximum amount of social security taxes that an individual will pay. For 2001, the maximum social security wage base will be $80,400, an increase of $4,200 from the 2000 maximum of $76,200. Since social security taxes are withheld at a rate of 6.2%, the maximum amount of social security taxes that can be withheld from a person's wages will increase from $4,724.40 in 2000 to $4,984.80 in 2001.

In addition to social security taxes, every individual has medicare taxes withheld from their pay at a rate of 1.45%. There is no limit to the amount of wages subject to medicare taxes.

Wages in excess of the social security max for 2000:

For 2000, each employee is subject to social security taxes on the first $76,200 of wages earned during the year. At a rate of 6.2%, this translates into total social security taxes of $4,724.40. There are situations when a taxpayer will have more than the maximum of $4,724.40 withheld during the course of the year.

Since employers are required to withhold social security taxes on the first $76,200 earned by each of their employees (this allows the government to keep the employer's matching contributions), taxpayers who work for more than one employer and earn more than $76,200 during the year will have excess social security taxes withheld. Any excess social security taxes withheld during the year should be reported on line 62 of the Form 1040 and counted as additional federal income taxes withheld.

For example:

A person works for two employers and earns $50,000 from each employer. Employer #1 will withhold $3,100 in social security taxes ($50,000 * 6.2%). Employer #2 will also withhold $3,100 in social security taxes. The total social security taxes withheld during the year for this person is $6,200. Since the maximum amount of social security taxes that a person will be subject to in 2000 is $4,724.40, this person will have excess taxes of $1,475.60 withheld and should re-characterize those excess social security taxes as federal income taxes withheld.

 

A) Social security taxes withheld by Employer #1

$3,100.00

B) Social security taxes withheld by Employer #2

$3,100.00

C) Total social security taxes withheld during the year (A+B)

$6,200.00

D) Social security max for 1999

$4,724.40

E) Excess social security taxes withheld (C-D)

$1,475.60

 

Calculating the self-employment tax:

Self-employed individuals are subject to social security and medicare taxes as well. These two taxes are reported as part of an additional tax known as the "self-employment tax". Self-employment taxes are calculated on a Schedule SE and are reported on line 50 of the Form 1040.

The self-employment tax is based on a social security tax rate of 12.4% and a medicare tax rate of 2.9%. These rates are double those paid by employees since a self-employed person must pay both the employee's portion and the employer's portion of both taxes.

If an individual earns income as an employee and as an independent contractor, and the combined income exceeds $76,200 in 2000, Section B of the Schedule SE should be completed. Otherwise, the calculation will be incorrect and too much self-employment taxes will be submitted.

www.ssa.gov

A great place to find out more about your social security taxes and projected benefits is at the Social Secuirty Administration's website located at www.ssa.gov.

 

FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:

2001 wage base max: $80,400

2000 wage base max: $76,200

1999 wage base max: $72,600

1998 wage base max: $68,400

1997 wage base max: $65,400

1996 wage base max: $62,700

1995 wage base max: $61,200

1994 wage base max: $60,600

 


TO DO LIST FOR NOVEMBER, 2000

Month

Income Taxes

Saving and Investing

 

 

November

  • Good time to make semi-annual donation of clothing and household items to charitable organizations

  • Need to make applicable elections in connection with employer's flexible spending account

  • Contact MDTAXES CPA to discuss any year end tax planning questions or strategies

  • Determine whether you should convert your IRAs to a Roth IRA


1999 & 2000 TAX FACTS

  • For 2000, the standard deduction for a single individual is $4,400 and for a married couple is $7,350. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes, real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.

  • For 2000, the personal exemption is $2,800. Individuals will claim a personal deduction for themselves, their spouse, and their dependents.

  • The maximum earnings subject to social security taxes has been increased to $80,400 in 2001 from $76,200 in 2000.

  • The standard mileage rate has been increased back to $.325 per mile as of January 1, 2000 from a rate of $.31 per mile as of April 1, 1999.

  • The maximum annual contribution to a 401(k) plan or a 403(b) plan is currently $10,500 in 2000.


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