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RECENT TAX LAW CHANGES
Andrew D. Schwartz, CPA
Exactly four weeks to the day before the November 2nd presidential
election, President Bush signed the Working Families Tax Relief Act of 2004
into law. While these new rules will save American taxpayers an estimated
$136 billion in taxes, the primary focus of this act was to extend expiring tax
breaks. How will this recent tax-cut package save you taxes?
$130 in your pocket: Just about
everyone who pays taxes will save a little money since the lowest tax
bracket was expanded. For married couples, the 10% bracket, which was
scheduled to end at $12,000 for 2005, will instead top off at $14,600.
If you're single, cut these amounts in half - which means you'll save $65
An extra $300 per child: The
tax act reinstated the child tax credit to $1,000. Previously, this credit for children under the age of 17 was slated to decrease to $700 per child
effective January 1, 2005.
A little marriage penalty relief: Thanks
to this Tax Act, the standard deduction of a married couple will continue to
be double that of a single individual. Same for the 15% tax bracket.
These two tax breaks save non-itemizers $920, assuming they're in the 25%
The teacher tax break: Teachers, aides,
principals, and counselors of
kindergarten through 12th grade can continue to claim up to
$250 in school supplies as an "above the line" deduction for two more years.
Originally, this tax break ended on December 31, 2003.
The anti-Hummer deduction: Intrigued by
those hybrid vehicles? The "clean-fuel" deduction available to people
who purchase hybrids will remain at $2,000 through 2005. Prior to this
tax-cut package, the clean-fuel deduction was slated to be $1,500 in 2004
and $1,000 in 2005.
A little AMT help: To help some
people avoid the Alternative Minimum Tax, the allowable exemption was
increased from $45,000 to $58,000 for married couples and from $33,750 to
$40,250 for single taxpayers.
Wondering what ever happened to the concept of tax
simplification? Don't forget that all the tax rules are on track to
sunset in 2010 back to the pre-2001 tax code.
MAX INCREASES TO $90,000 FOR 2005
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 2005 will be
$90,000, an increase of $2,100 from the 2004 max of $87,900. At a
rate of 6.2%, the total social security taxes that your employer
will withhold from your salary increases from $5,449.80 in 2004 to $5,580.00 in 2005.
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 $87,900?
For 2004, each of your employers will withhold social security taxes from the first $87,900
that you earn from them. At a rate of 6.2%, this translates into total social security taxes of $5,449.80. There are situations when you might have more than the maximum of $5,449.80 withheld during the course of the year.
Since employers are required to withhold social security taxes on the first $87,900 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 $87,900 during 2004, 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.
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 2004 is limited to $5,449.80, the excess of $3,850.20 counts as additional federal income taxes paid in by you.
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 2004
E) Excess social security taxes withheld (C-D)
Calculating the self-employment tax:
Self-employed individuals are subject to social security and
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 $87,900 in 2004,
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.
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:
2005 wage base max: $90,000
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
TAX AND FINANCIAL PLANNING CALENDAR FOR
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
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 $87,900 this month
- For 2004 the standard deduction for a single individual is
$4,850 and for a married couple is $9,700. 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 March, 1998
newsletter addressed the issue of itemizing your deductions.
- For 2004,
the personal exemption is $3,100. Individuals will claim a
personal deduction for themselves, their spouse, and their dependents.
- The maximum earnings subject to social security taxes will be $90,000 for 2005
up from $87,900 in 2004.
- The standard mileage rate is $.375 per mile for 2004. Deducting automobile expenses was
addressed in our March, 1996
- The maximum annual contribution to a 401(k) plan or a
403(b) plan is $13,000 for 2004.
And if you'll be 50 or older by December 31, 2004, you can contribute an extra
$3,000 into your 401(k) or 403(b) account this year. For 2005, you can
contribute $14,000 ($18,000 if 50 or older) into your 401(k) or 403(b) account
- The maximum annual contribution to your IRA is $3,000 for
And once you turn 50, you can contribute an extra
$500 into your IRA this year. For 2005, you can contribute up to $4,000
($4,500 if 50 or older) into your IRA.
copyright - 2004 - The MDTAXES Network
Tax and financial planning calendar for November, 2004
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