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NOTICE TO RESIDENTS OF MARYLAND

We are NOT affiliated with the State of Maryland. If you are looking for information about Maryland income taxes, please go to www.marylandtaxes.com.


Useful Links:

FindAGoodCPA.com - Not a healthcare professional?  Find a CPA or EA who understands the tax issues specific to you.

Nanny Taxes - Find out what's involved with complying with the Nanny Tax Rules

IRS Web Site - for tax forms, publications, and general tax information.

Exchange Authority - New England's first authority for IRC 1031 Exchanges

Cost Segregation Studies - Accelerate tax depreciation deductions on new and existing buildings through cost segregation studies

Social Security - find out the latest rules or your projected retirement benefit.

The Company Corporation offers fast, reliable & affordable incorporation and LLC services.


MONTHLY TAX NEWSLETTER

November 2010

NO INCREASE TO SOCIAL SECURITY MAX FOR 2011

by Andrew D. Schwartz, CPA

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.

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 2010 is limited to $6,622, the excess of $2,678 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 2010

$6,622.00

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

$2,678.00

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 except for 2010 and 2011. The wage base maximum has been increased as follows:

2009, 2010 & 2011 wage base max: $106,800
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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IRS ISSUES GUIDANCE EXPLAINING 2011 CHANGES TO FLEXIBLE SPENDING ARRANGEMENTS

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

WASHINGTON — 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.

The Affordable Care Act, enacted in March, established a new uniform standard that, effective Jan. 1, 2011, applies to FSAs and health reimbursement arrangements (HRAs). Under the new standard, the cost of an over-the-counter medicine or drug cannot be reimbursed from the account unless a prescription is obtained. The change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles. The new standard applies only to purchases made on or after Jan. 1, 2011, so claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan.

TOP


IRS ANNOUNCES FEW INCREASES TO RETIREMENT SAVINGS LIMITS FOR 2011

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 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:

  Single Individuals Married Couples
Phase-out begins $107,000 $169,000
Phase-out ends $122,000 $179,000

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.

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 2010 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2011.

2011 Maximum Retirement Account Contributions


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

401(k) or 403(b)
 
$16,500
($1,375.00/month)
$22,000
 ($1,833.33/month)

SIMPLE IRA
 
$11,500
($958.33/month)
$14,000
 ($1,166.67/month)

SEP IRA
 
$49,000
($4,083.33/month)
$49,000
($4,083.33/month)

Solo 401(k)
 
$49,000
($4,083.33/month)
$54,500 or
($4,541.67/month)

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

TOP


TAX AND FINANCIAL PLANNING CALENDAR FOR NOVEMBER 2010

Month

Income Taxes

Saving and Investing

 

 

 

November

  • Need to make applicable elections in connection with employer's flexible spending account
  • 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.  Or, track your donation using the App, UDoGood.
  • Contact an MDTAXES CPA to discuss any year end tax planning questions or strategies
  • Determine whether to convert your IRAs to a Roth IRA prior to 12/31/10 to be eligible to spread the income on the conversion over two tax years.
  • Order your free credit report from here

 TOP


2010 & 2011 TAX FACTS

  • For 2010, the standard deduction for a single individual is $5,700 and for a married couple is $11,400. 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 2010, the personal exemption is $3,650. Individuals will claim a personal deduction for themselves, their spouse, and their dependents. 
  • The maximum earnings subject to social security taxes is $106,800 for 2010 and 2011.
  • The standard mileage rate is $.50 per business mile as of January 1, 2010, down from $.55 per mile for 2009.
  • The maximum annual contribution into a 401(k) plan or a 403(b) plan is $16,500 in 2010 and 2011.  And if you'll be 50 or older by December 31st, you can contribute an extra $5,500 into your 401(k) or 403(b) account that year.
  • The maximum annual contribution to your IRA is $5,000 for 2010.  And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.  You have until April 15, 2011 to make your 2010 IRA contributions. 

TOP

Need Help With Your Nanny Payroll?
 

This Month's Topics

No Increase To Social Security Max For 2011

Irs Issues Guidance Explaining 2011 Changes To Flexible Spending Arrangements

IRS Announces Few Increases to Retirement Savings Limits For 2011

The FICA Refund for Medical Residents 

2010 & 2011 Tax Facts

Tax and Financial Planning Calendar for November 2010

 

NEWSLETTER ARCHIVES
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WHAT'S NEW WITH THE FICA REFUND?

In a shocking development, the IRS recently announced that they will be honoring the FICA tax refunds submitted by residency programs and individual doctors.  The catch is that only FICA taxes paid prior to 4/1/05 qualify.

For more information, go to our April 2010 Newsletter, our January 2009 Newsletter, or our February 2001 Newsletter or read through the IRS' Chief Counsel Advice Memorandum on this issue.

Let's work together to keep current on this hugely valuable tax break.  Please post whatever you read or hear regarding this FICA issue on our new Message Board we set up just for this topic.

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