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MONTHLY TAX NEWSLETTERNovember 2010
For the second year in a row, and just the second 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.
"The Social Security Act provides for an automatic increase in Social Security and SSI benefits if there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a cost-of-living adjustment (COLA) was determined to the third quarter of the current year. As determined by the Bureau of Labor Statistics, there is no increase in the CPI-W from the third quarter of 2008, the last year a COLA was determined, to the third quarter of 2010, therefore, under existing law, there can be no COLA in 2011." explains the Social Security Administration. For a complete list of the 2011 Social Security changes, check out this Fact Sheet available at www.ssa.gov.
At a rate of 6.2%, the maximum social security taxes that your employer will withhold from your salary remains at $6,622 for 2011. 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 2010 or 2011, 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 2010 and Earn More Than $106,800?
For 2010, 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 2010 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 and 2011. The wage base maximum has been increased as follows:
2009, 2010 & 2011 wage base max:
Please read about this important update to which types of medical expenses can no longer be paid with pre-tax dollars through the Flexible Spending Account you may have as part of your benefits at work:
IR-2010-95, Sept. 3, 2010
The Internal Revenue Service today issued guidance reflecting statutory changes
regarding the use of certain tax-favored arrangements, such as flexible spending
arrangements (FSAs), to pay for over-the-counter medicines and drugs.
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 2011.
According to the October 28th announcement made by the IRS on Pension Plan Limitations for 2011, "The limitations that are adjusted by reference to Section 415(d) generally will remain unchanged for 2011. This is because the cost-of-living index for the quarter ended Sept. 30, 2010, while greater than the cost-of-living index for the quarter ended Sept. 30, 2009, is less than the cost-of-living index for the quarter ended Sept. 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 2011
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 2010, you can contribute up to $16,500 into a 401(k) or 403(b) plan through salary deferrals in 2011.
Anyone 50 or older by December 31, 2011 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 2010.
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 2011, 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 2011, for a total annual contribution of $14,000, unchanged from 2010.
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 2011 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 2011. While the amount you can earn and still contribute to a Roth has not increased for single individuals, this threshold did increase by $2,000 for all taxpayers 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. Lately, we've written a lot of articles on Roth Conversions, which you can locate on our Newsletter Archive.
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 $169,000 - $179,000, 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 2010 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2011.
2011 Maximum Retirement Account Contributions
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