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WHAT'S NEW WITH THE FICA REFUND?

A lot is new!!!  And it's all good!  Check out the memorandum issued by the U.S. District Court in Minneapolis and you'll see that the court found that medical residents and fellows might not be subject to FICA taxes in many instances.

For more information, go to our February, 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

 

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November, 2003

SOCIAL SECURITY MAX INCREASES TO $87,900 FOR 2004

by Andrew D. Schwartz, CPA

Each year, the government increases the maximum social security taxes that you can pay. According to the Social Security Administration, the maximum wage base for 2004 will be $87,900, an increase of $900 from the 2003 max of $87,000. At a rate of 6.2%, the total social security taxes that your employer will withhold from your salary increases from $5,394.00 in 2003 to $5,449.80 in 2004.

In addition, every employee has Medicare taxes withheld from their pay at a rate of 1.45%. There is no limit on your wages subject to this tax.

Do You Work For More Than One Employer and Earn More Than $87,000?

For 2003, each of your employers will withhold social security taxes from the first $87,000 that you earn from them.  At a rate of 6.2%, this translates into total social security taxes of $5,394.00. There are situations when you might have more than the maximum of $5,394.00 withheld during the course of the year.

Since employers are required to withhold social security taxes on the first $87,000 earned by each of their employees (this allows the government to keep the employer's matching contributions), if you work for more than one employer and earn more than $87,000 during 2003, you'll have excess social security taxes withheld. Make sure to take credit for these excess taxes on your 1040 as additional federal taxes paid in.

For Example:

Let's say you work for two employers and earn $75,000 from each employer. Employer #1 will withhold $4,650 in social security taxes ($75,000 * 6.2%). Employer #2 will also withhold $4,650 in social security taxes - for a total of $9,300 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2003 is limited to $5,394.00, the excess of $3,906.00 counts as additional federal income taxes paid in by you.

 

A) Social security taxes withheld by Employer #1

$4,650.00

B) Social security taxes withheld by Employer #2

$4,650.00

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

$9,300.00

D) Social security max for 2003

$5,394.00

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

$3,906.00

 

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 you earn income as an employee and as an independent contractor, and your combined income exceeds $87,000 in 2003, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and too much self-employment taxes will be remitted.

www.ssa.gov

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:

2004 wage base max: $87,900
2003 wage base max: $87,000
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

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DISABILITY INSURANCE CHECKUP

Do you have enough disability insurance coverage in force?  You can read about the basics of disability insurance, or, for a complimentary analysis of your current disability insurance needs, please complete this form, and a professional from our Directory of Financial Advisors will contact you shortly.  You can also e-mail us your questions at disabilityinsurance@mdtaxes.com.

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DON'T GET ON THE IRS RADAR SCREEN

by Charles K. Montecino, CPA

What's the easiest way to keep off the IRS' radar screen?  By always filing your personal and business tax returns when due.  Even if you don't have the funds to pay all of the taxes that you owe, filing the returns by their due date is a must. 

Potentially, you will be involved with as many as four types of tax returns, with each having different filing and payment requirements.  Let's take a look at the various types of tax returns, and some of the  problems that can result if you don't comply with the regulations.

Personal Returns

Most everyone is aware that the 1040 is the form number of the personal income tax return.  On this return, you report your W-2 income if you're an employee, your net self-employment income if you're a sole proprietor, or your profit distribution if you're part of a partnership, limited liability company or S corporation. 

As an employee, your W-2 also reflects the income taxes you had withheld during the year, which you'll report on your return as well.  If you're self-employed or part of one of the other entities mentioned above, you generally need to pay in your taxes by making quarterly estimated tax payments. If required, it's important to make these quarterly payments on time.  Otherwise, you could end up being hit with an underpayment penalty by the IRS. 

Your tax return is generally due April 15th each year.  Even though you can automatically extend the due date of your return to August 15th simply by filing a Form 4868 with the IRS, you are still required to pay any taxes due by April 15th.  The extension only buys you more time to file your tax return.  It doesn't extend the due date for paying your taxes. 

Failure to make an adequate payment with the extension request could cause the return to be considered filed late, which might result in your being assessed late payment penalties and late filing penalties.  While the late payment penalty is 0.5% per month on the balance due (in addition to any interest you will owe), the late filing penalty is a whopping 5% per month for the first five months the return is filed late - up to a maximum of 25% of the balance due as reflected on your tax return.

Business Returns

You can choose to run your business as one of four types of tax entities.  Each has different filing requirements as follows: 

  • Sole proprietors file Form 1040, Schedule C

  • Partnerships and limited liability companies (LLC) file a Form 1065

  • Corporations file either a Form 1120 or 1120S. 

The due date for filing a corporate tax return is two and a half months after the corporation's year end - which is March 15th for a calendar year business.  All other tax returns, including the 1065, are generally due April 15th. 

Even though the Form 1065 is an information return which almost never has a tax due, it must still be filed on time every year.  If not, the IRS might penalize the partnership for every day that the form is late.  The same holds true for an 1120S, which rarely has taxes due with the return.  A Form 1120 may have taxes due if there is a profit, and the late filing penalty is the same 5% per month as explained above.

Payroll Tax Returns

If you have employees (including yourself if you're an employee of your own corporation), you're required to withhold social security and Medicare taxes from the salaries paid.  And as the employer, you need to match these taxes withheld.  Plus, you will most likely withhold federal income taxes on behalf of each of your employees. 

Periodically, you need to remit those taxes to the IRS either by depositing the taxes due with your bank, or by paying them via the telephone through the IRS' electronic funds transfer program (ETFPS).

The frequency that you need to remit these deposits is determined by the total amount of tax deposits you made during the prior year.  Failure to remit these taxes on time could lead to potentially large penalties.  If you're just one day late, the penalty is 2% of the taxes due, and then quickly jumps to 5% if you're 6 days late.  And if you're more than 16 days late, you should expect to pay a 10% penalty to the IRS. 

Plus, if you neglect to deposit the payroll taxes that are due, the IRS will assess a "trust fund penalty" against the person, or persons, responsible for paying the tax.  That means they will attempt to collect the unpaid taxes directly from you.  You never want this to happen to you.

Retirement Plan Returns

Believe it or not, you even need to file an annual tax return for your retirement plan, unless certain exceptions are met.  And even though there are no payments due with these tax returns, you want to make sure that your plan is always current with the IRS filing requirements since there is a penalty for each day the return is filed late.

It's also important to comply with your plan provisions regarding eligibility, vesting and making contributions.  Failure to do so could cause the plan to be disqualified.

 

Following these simple rules will help keep you off the IRS radar screen.  Not complying could cause tax liens to be filed, wages garnished, bank accounts seized, ruined credit and many sleepless nights.

 

Charles K. Montecino is a Certified Public Accountant located in Pitman, New Jersey.  In the last thirty years he has helped countless numbers of taxpayers that found themselves on the IRS radar screen for not complying with various IRS regulations.  More importantly, he has helped even more people from getting on the IRS' radar screen.  You can find more information at www.montecinocpa.com or www.taxproblemssolved.com.

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TAX AND FINANCIAL PLANNING CALENDAR FOR NOVEMBER, 2003

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

  • Someone making $100,000 per year will go over the social security max of $87,000 this month

  • Determine whether to convert your IRAs to a Roth IRA if your income will be less than $100,000 this year

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2002 & 2003 TAX FACTS

  • For 2003, the standard deduction for a single individual is $4,750 and for a married couple is $9,500. 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. Our February, 1998 newsletter addressed the issue of itemizing your deductions.
  • For 2003, the personal exemption is $3,050. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes has increased to $87,900 for 2004 from $87,000 in 2003.
  • The standard mileage rate is $.36 per mile for 2003, down from $.365 per mile for 2002. Deducting automobile expenses was addressed in our February, 1996 newsletter .
  • The maximum annual contribution to a 401(k) plan or a 403(b) plan has increased to $12,000 for 2003 from $11,000 in 2002.  And if you'll be 50 or older by December 31, 2003, you can contribute an extra $2,000 into your 401(k) or 403(b) account this year.
  • The maximum annual contribution to your IRA is $3,000 for 2003 and 2002.  And once you turn 50, you can contribute an extra $500 into your IRA this year.

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copyright - 2003 - The MDTAXES Network



Tax and financial planning calendar for November, 2003


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The Millionaire Next Door.  Find out the habits of America's wealthy. You'll be surprised at who comprises the bulk of America's millionaires.

Organize Your Finances with Quicken 2001 in a Weekend

Both these books are available at Barnes&Noble.com.


If you have a friend, colleague, or family member who is always bragging about things they have done to cut their taxes, then check out our new gift items with the saying - "Everything is deductible...until you get audited!"


SAVE MONEY BY TAKING ADVANTAGE OF LOW INTEREST RATES

Are you taking advantage of these reduced rates?  Lower rates will help you cut down on the time it takes you to get out of debt by minimizing the interest you pay each month.  Remember, the lower the interest rate, the larger the portion of your monthly payment that will get applied against your outstanding balances.

  • If you're carrying a balance on your credit cards, there are plenty of opportunities available to cut your interest rate.  Check out CardOffers.com to find the best deals available.

  • If you still owe student loans, see how much you'll save by consolidating your loans into one loan with a lower interest rate at FinancialAid.com or at AAMC.org.

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HAVE YOU CHECKED YOUR CREDIT REPORT LATELY?

You work hard to keep your credit report as clean as possible. Even so, the current credit reporting system allows for incorrect items to appear on your report that could adversely affect your credit score. Make sure that the information on your credit report is accurate by ordering a free copy of your credit report on-line at  OnlineCreditInfo.com or by purchasing a merged credit report reflecting information from all three credit reports at 130secondreport.com.

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