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MONTHLY TAX NEWSLETTER

November 2007

SOCIAL SECURITY MAX INCREASES TO $102,000 FOR 2008

by Andrew D. Schwartz, CPA

Each year, the government bumps up the maximum social security taxes that you can pay. For 2008, the maximum wage base jumps to $102,000, an increase of $4,500, or 4.6%, over the 2007 max of $97,500. 

The Social Security Administration predicts that 12 million individuals will end up paying higher taxes due to this increase, out of the estimated 164 million workers who will pay social security taxes next year.

At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary increases by $279, from $6,045 in 2007 to $6,324 in 2008.  In addition, your employer also withholds Medicare taxes from your pay at a rate of 1.45%. There is no limit on your wages subject to this tax.

Calculating the Self-employment Tax:

If you're self-employed and earn more than $400 in net profit from your business, you're subject to social security and Medicare taxes as well. Known as the "self-employment tax", you'll need to complete a Schedule SE to calculate this tax, and then report the amount due on page 2 of your 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.  Remember, when you work as an employee, your employer matches the social security and Medicare taxes withheld from your pay.

Unlike most other taxes, when dealing with self-employment taxes, the more you earn, the less you pay in taxes.  If you earn income as an employee and as an independent contractor, and your combined income exceeds $97,500 in 2007, make sure to complete Section B of the Schedule SE. Otherwise, your tax calculation will be incorrect and you'll end up overpaying your self-employment taxes.

Do You Work For More Than One Employer in 2007 and Earn More Than $97,500?

For 2007, each of your employers withholds social security taxes from the first $97,500 that you earn from them.  If you work for more than one employer and your total salary from all sources exceeds that threshold, you'll have excess social security taxes withheld. Make sure to claim a 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 withholds $4,650 in social security taxes ($75,000 * 6.2%). Employer #2 also withholds $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 2007 is limited to $6,045, the excess of $3,255 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 2007

$6,045.00

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

$3,255.00

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:

 

2008 wage base max: $102,000
2007 wage base max: $97,500
2006 wage base max: $94,200
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


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ANDREW SCHWARTZ CPA ANNOUNCES DECEMBER LINEUP FOR "TAX BREAK" WEEKLY RADIO SHOW

Andrew D Schwartz CPA has agreed to host a weekly, one-hour radio show on taxes through WorldTalkRadio.com. The show can be heard live each Wednesday at 7 pm ET (4 pm PT) at www.worldtalkradio.com starting on December 5th. Each week, Andrew will interview various guests who can add information and insight to that week's topics, as well as take questions directly from the listeners.

Please join Andrew to discuss the following topics during December:

  • December 5th - Benefits of Being Your Own Boss
  • December 12th - Year end Tax Savings Ideas
  • December 19th - Save Taxes By Being Green
  • December 26th -  Last Minute Tax Planning & Saving For Retirement

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IRS ANNOUNCES FEW INCREASES TO RETIREMENT SAVINGS LIMITS FOR 2008

by Andrew D. Schwartz, CPA

Last month, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations.  Unfortunately, the bulk of the retirement savings limits will not increase from 2007. 

Don't Go Changin'

Most working professionals have access to a 401(k) plan or a 403(b) plan at work.  Amounts contributed to these plans generally reduce your taxable earnings and always grow tax deferred.  Like 2007, you can contribute up to $15,500 into a 401(k) or 403(b) plan through salary deferrals in 2008. 

Anyone 50 or older by December 31, 2008 can contribute an extra $5,000 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $20,500.  That is the same as what was allowed during 2007.

Many smaller employers offer their staff access to SIMPLE/IRAs instead.  SIMPLE's work just like 401(k) plans, which means it's up to you to fund the bulk of this retirement savings account through salary deferrals.  For 2008, the maximum contribution into your SIMPLE remains at $10,500.  Anyone 50 or older by December 31st can sock away an additional $2,500 in 2008, for a total annual contribution of $13,000, unchanged from 2007. 

Small Change

Are you self-employed?  Each year, you can contribute up to 20% of your net self-employment income into a SEP IRA.  The maximum contribution into your SEP IRA for 2008 has been increased by $1,000, up to $46,000.

Solo 401(k)'s are an attractive alternative to many sole proprietors and business owners with no full time employees who work more than 1,000 hours per year besides a spouse.  If you don't have access to a 401(k) or 403(b) plan through another employer, the Solo 401(k) plan makes it easier for you to hit next year's max of $46,000.  If you're 50 or older, your maximum contribution into a Solo 401(k) jumps to $51,000, due to a "catch up" contribution of $5,000 allowed with these types of plans.

The IRS also announced that the maximum amount of wages and net self-employment income that you can use to determine certain retirement plan contributions has increased to $230,000 for 2008, up from $225,000  in 2007.

Increase to IRAs

Don't forget about IRA's.  Thanks to the 2001 Tax Act, the amount you and your spouse can each contribute into an IRA is scheduled to increase by 25%, from $4,000 in 2007 up to $5,000 in 2008.  Anyone 50 or older can also contribute an extra $1,000 into their IRA, increasing the total allowable contribution to $6,000.  You have until April 15, 2009 to max out your IRA contributions for 2008.

There is also good news for people looking to contribute to a Roth IRA in 2008.  The amount you can earn and still contribute to a Roth has increased by $3,000 for married couples and by $2,000 for single individuals, as follows:

  Single Individuals Married Couples
Phase-out begins $101,000 $159,000
Phase-out ends $116,000 $169,000

If your income is too high for a Roth, don't forget that the rules changed last year, eliminating the income limitation as of 2010 for people looking to convert their IRAs to a Roth IRA.  This tax law change provides high-income taxpayers with a great opportunity to get money into these tax-free investment accounts.  For more information, please check out the article, The Re-Emergence of Non-Deductible IRAs, available on our March 2007 Newsletter.

And if you're married and your spouse isn't covered under either an employer sponsored or self-employed retirement plan during the year, the phase-out range for your spouse making a deductible IRA contribution has increased to $159,000 - $169,000, which is identical to the Roth IRA phase-out limits.

Monthly Budget

Most people won't be able to max out these tax-advantaged retirement options unless they get on a budget and put away a set amount of money each month.  With 2007 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2008.

2008 Maximum Retirement Account Contributions


Retirement Savings Option
 
Under the age
 of 50
50 or older by December 31st

401(k) or 403(b)
 
$15,500
($1,291.67/month)
$20,500
 ($1,708.33/month)

SIMPLE IRA DEFERRALS
 
$10,500
($875.00/month)
$13,000
($1,083.33/month)

SEP IRA
 
$46,000
($3,833.33/month)
$46,000
($3,833.33/month)

Solo 401(k)
 
$46,000
($3,833.33/month)
$51,000 or
($4,250.00/month)

IRA
 
$5,000
($416.67/month)
$6,000
($500.00/month)

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TAX AND FINANCIAL PLANNING CALENDAR FOR NOVEMBER, 2007

Month

Income Taxes

Saving and Investing

 

 

 

November

  • Good time to make semi-annual donation of clothing and household items to charitable organizations.  Don't forget to make a list, including each item's condition, since only items "good or better" qualify for deduction.
  • 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
  • Determine whether to convert your IRAs to a Roth IRA if your income will be less than $100,000 this year
  • Order your free credit report from here

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2006 & 2007 TAX FACTS

  • For 2007, the standard deduction for a single individual is $5,350 and for a married couple is $10,700. A person will benefit by itemizing once allowable deductions exceed the applicable standard deduction. Itemized deductions include state and local income taxes (or sales taxes), real estate taxes, mortgage interest, charitable contributions, and unreimbursed employee business expenses.
  • For 2007, the personal exemption is $3,400. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $97,500 for 2007, increasing to $102,000 in 2008.
  • The standard mileage rate is $.485 per business mile for 2007, up from $.445 per mile in 2006.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $15,500 in 2007 and 2008.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,000 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $4,000 for 2007.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2008 to make your 2007 IRA contributions. 

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This Month's Topics

NEWSLETTER ARCHIVES
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WHAT'S NEW WITH THE FICA REFUND?

Most recent information issued by the IRS

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.

Copyright 2007 The MDTAXES Network by CPANiche, LLC    Email us at  info@cpaniche.com