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MONTHLY TAX NEWSLETTERNovember 2009
For the first time since Congress enacted automatic Cost-of-Living Adjustments (COLA) for Social Security back in 1975, there will be no increase to the Social Security Wage Base. This annual calculation is based on whether there "is an increase in the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the last year to the corresponding period of the current year. This year there was no increase in the CPI-W from the third quarter of 2008 to the third quarter of 2009," explains the Social Security Administration.
At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary remains at $6,622 for 2010. 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 $106,800 in 2009, 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 2009 and Earn More Than $106,800?
For 2009, each of your employers withholds social security taxes from the first $106,800 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 2009 is limited to $6,622, the excess of $2,678 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 except for 2010. The wage base maximum has been increased as follows:
2009 & 2010 wage base max:
Check out this unbelievable opportunity that my wife and I stumbled on last year when we were looking into a family ski trip for the pre-tax season winter. Click on the Kids Ski Free link on www.SkiNH.com to learn how to get free lift tickets to most of the ski mountains in New Hampshire for your child in the fourth and fifth grade.
The cost is just $20 per child for a booklet chock full of complimentary lift tickets. Please note that your fourth grader also needs to complete a short essay on some topic pertaining to the history of skiing in New Hampshire. My daughter wrote about snowmaking.
The fifth graders have it much easier. Simply submit your $20 fee along with a copy of their recent report card to prove that they are currently in the fifth grade, and you're all set.
Last winter, my two two kids were the perfect age of this promotion - a fifth grade son and a fourth grade daughter. We really got lucky finding this free skiing opportunity last year. By the end of the winter, my kids skied eight times, and we didn't pay a dime for their lift tickets. Plus, many of the mountains offer discounted or two-for-one tickets for adults who accompany the child. Here are some of the incredible ski bargains we've enjoyed last winter thanks to SkiNH.com:
According to their site, "Ski NH is the statewide association representing 37 alpine and cross country resorts and more than 200 lodging properties in New Hampshire. The Earn Your Turns and Snowsports Passport program are made possible by the support of the NH Department of Travel and Tourism Development" plus a few other sponsors.
As it turns out, Vermont has a similar program for fifth graders only. For more info about the free skiing available for kids in Vermont, check out the Kids Zone page on SkiVermont.com.
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 2010.
According to the October 15th announcement made by the IRS on Pension Plan Limitations for 2010, "The limitations that are adjusted by reference to Section 415(d) will remain unchanged for 2010. This is because the cost-of-living index for the quarter ended September 30, 2009, is less than the cost-of-living index for the quarter ended September 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation."
No Increases for 2010
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 2009, you can contribute up to $16,500 into a 401(k) or 403(b) plan through salary deferrals in 2010.
Anyone 50 or older by December 31, 2010 can contribute an extra $5,500 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $22,000. That is the same as what was allowed during 2009.
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 2010, the maximum contribution into your SIMPLE remains at $11,500. Anyone 50 or older by December 31st can sock away an additional $2,500 in 2010, for a total annual contribution of $14,000, unchanged from 2009.
And if you are self-employed, you can contribute up to 20% of your net self-employment income into a SEP IRA. The maximum contribution into your SEP IRA for 2010 remains at $49,000.
One Increase to IRAs
Don't forget about IRA's. There is a bit of good news for people looking to contribute to a Roth IRA in 2010. While the amount you can earn and still contribute to a Roth has not increased for single individuals, this threshold did increase by $1,000 for married couples as follows:
If your income is too high for a Roth, don't forget that the rules changed a few years ago, 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 these articles:
And finally, 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 $167,000 - $177,000, 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 2009 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2010.
2010 Maximum Retirement Account Contributions
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