Need Tax Help?
Check our offices page to find an MDTAXES CPA near you.
Get our Newsletters
Enter your email address to receive our monthly e-newsletter.
Our CPAs answer your taxing questions.
JOIN THE NETWORK!
CPAs - find out more about the benefits of joining The MDTAXES Network.
MONTHLY TAX NEWSLETTERNovember 2007
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
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.
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 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:
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
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.
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.
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:
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.
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
|Copyright 2007 The MDTAXES Network by CPANiche, LLC Email us at email@example.com|