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SOCIAL SECURITY MAX INCREASED TO $84,900 FOR 2002
Each year, the government raises the maximum amount of social
security taxes that an individual will pay. For 2002, the maximum
social security wage base will be $84,900, an increase of $4,500 from
the 2001 maximum of $80,400. 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 $4,984.80 in
2001 to $5,263.80 in 2002.
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 2001:
For 2001, each employee is subject to social security taxes on the
first $80,400 of wages earned during the year. At a rate of 6.2%,
this translates into total social security taxes of $4,984.80. There
are situations when a taxpayer will have more than the maximum of
$4,984.80 withheld during the course of the year.
Since employers are required to withhold social security taxes on the
first $80,400 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 $80,400 during
the year will have excess social security taxes withheld. Any excess
social security taxes withheld during the year should be reported on
your Form 1040 as additional federal income taxes withheld.
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 2001 is $4,984.80,
this person will have excess taxes of $1,215.20 withheld and should
re-characterize those excess social security taxes as federal income
A) Social security taxes withheld by Employer #1
B) Social security taxes withheld by Employer #2
C) Total social security taxes withheld during the year (A+B)
D) Social security max for 2001
E) Excess social security taxes withheld (C-D)
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 as an
additional tax on page 2 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 $80,400 in 2001, Section
B of the Schedule SE should be completed. Otherwise, the calculation
will be incorrect and too much self-employment taxes will be submitted.
A great place to find out more about your social security taxes and
projected benefits is at the Social Security 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:
2002 wage base max: $84,900
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
SHOULD YOU CONVERT YOUR IRAS TO A ROTH IRA??
Each year that your income is less
than $100,000, you're allowed to convert some or all of your
traditional IRAs to a Roth IRA. By doing so, you'll take IRA
money that is growing tax deferred and turn it into Roth IRA money
that will grow tax-free. The downside to converting is that
you'll owe taxes on the amount converted.
Why bring up this topic now?
With the markets down significantly from their highs of two years
ago, converting some or all of your IRA money might make sense.
Since your IRAs have most likely decreased in value, the taxes paid
on the conversion will be lower this year than ever before.
Plus, once the markets rebound, all of the future earnings will be
tax-free for you.
Should you consider converting
your IRAs to a Roth IRA? To help you decide what to do, we've
prepared this Roth IRA Conversion Quiz.
Please answer the following ten
questions. When you are done, simply add up your score, and compare
your score with the table found at the bottom of this page to
determine whether you should consider converting your IRA to a Roth IRA.
Question 1: How many years
before you anticipate taking distributions from your IRA or Roth IRA?
Question 2: At what rates do
you think you'll pay taxes in the future? (Currently, there are five
tax brackets: 15%, 28%, 31%, 36%, 39.6%.)
Question 3: Will you be in a
different tax bracket in the near future?
Question 4: How will you pay
the taxes that will be due in connection with the conversion?
Remember, the taxes on the conversion will be due in the year of the conversion.
Question 5: Do you trust the
government not to change the rules as they pertain to Roth IRA's?
Question 6: How do you feel
about pre-paying income taxes to the government?
Question 7: At what age will
you begin to withdraw money from your IRA or Roth IRA?
Question 8: How do you feel
about your heirs paying income taxes on the balance in your IRA's and
Roth IRA's that they will eventually inherit?
Question 9: How do you feel
about the long-terms prospect of your IRA investment portfolio?
Question 10: How do you feel
about withdrawing money from your IRA's for education costs, medical
expenses, or other uses?
Bonus Question: What will your
income be this year? If you're married, you need to determine what
your combined income will be.
Total up the points from each
question. If your score is:
CALENDAR FOR THE MONTH OF NOVEMBER, 2001
Saving and Investing
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
FALL IS A GREAT TIME FOR FOLIAGE AND FOR
If you're married, and you and your spouse need
some guidance, check out
(Brought to You By Your Friends at MDTAXES.COM)
For 2001, the standard deduction for a single individual is $4,550
and for a married couple is $7,600. 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 2001, the personal exemption is $2,900. Individuals
will claim a personal deduction for themselves, their spouse, and
- The maximum earnings subject to social security taxes
has been increased to $84,900 in 2002 from $80,400 in 2001.
- The standard mileage rate has been increased to
$.345 per mile as of January 1, 2001 from $.325 per mile
- The maximum annual contribution to a 401(k) plan or
a 403(b) plan remains at $10,500 for 2001, and has been
increased to $11,000 for 2002.
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