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MONTHLY TAX NEWSLETTERNovember 2013
year, the government bumps up the maximum Social Security taxes
that you can pay.
For 2014, the maximum wage base jumps to
$117,000, an increase of $3,300, or 2.8%, over the max of
$113,700 that was in place for 2013.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $7,254. This is $205 higher than the 2013 max of $7,049.
Higher Medicare Taxes Due To The Affordable Care Act:
As we wrote in our August 2012 Newsletter, on June 28, 2012, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act, including the increase to the Medicare taxes high-income taxpayers will pay starting in 2013.
Starting in 2013, the employee portion of the Medicare tax jumps from the current rate of 1.45% to 2.35% on earned income in excess of $200k for single individuals and $250k for married couples filing a joint tax return. As of now, the employer will continue to match their employees' Medicare taxes at a rate of 1.45%, which means the total Medicare tax will be 3.8% for high-income taxpayers.
For example, if you're single, and earn $500k from your job, expect to pay $2,700 in additional Medicare taxes (($500k - $200k) * .9%) for 2013 and beyond.
To increase taxes for high-income individuals even more, the Medicare tax will also apply to unearned income for the first time since this tax was enacted. People over the $200k or $250k threshold should expect to pay Medicare taxes at a rate of 3.8% on interest, dividends, capital gains, and net rental income beginning in 2013. You will pay this tax in addition to any federal and state income taxes due on this income.
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 $113,700 in 2013, 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 2013 and Earn More Than $113,700?
For 2013, each of your employers withholds social security taxes from the first $113,700 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 $3,150 in social security taxes ($75,000 * 6.2%). Employer #2 also withholds $3,150 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 2013 is limited to $7,049, the excess of $2,251 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, or learn about what's new for the 2014 Social Security Changes.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
2014 wage base max:
[Editor's Note] I started my career as a CPA specializing in taxes back in 1987, and right off the bat had to deal with the massive Tax Reform Act of 1986. Since that complicated set of tax rules was implemented more than 25 years ago, all I've seen is more and more complex tax rules enacted at an increasingly quick rate. Whether you're a taxpayer or a tax advisor, there is barely even enough time to digest one set of rules before the next set is forced upon us. To make things more challenging, none of the old rules ever seem to be taken away as these new rules are enacted.
Well, the Affordable Care Act gives us all a bunch of new rules affecting our taxes, including a new Health Insurance Premium Tax Credit. Check out these Questions and Answers on the Premium Tax Credit provided by our friends at the IRS.
On Halloween night, 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 2013.
According to the October 31st announcement made by the IRS on Pension Plan Limitations for 2014, "Some pension limitations such as those governing 401(k) plans and IRAs will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment. However, other pension plan limitations will increase for 2014."
No Increases for 2014
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 2013, you can contribute up to $17,500 into a 401(k) or 403(b) plan through salary deferrals in 2014.
Anyone 50 or older by December 31, 2014 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 $23,000. That is the same as what was allowed during 2013.
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 2014, the maximum contribution into your SIMPLE remains at $12,000. Anyone 50 or older by December 31st can sock away an additional $2,500 in 2014, for a total annual contribution of $14,500, unchanged from 2013.
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 2014 increases by $1,000 to $52,000.
Increase to IRAs
Don't forget about IRA's. Even if you're covered under a retirement plan at work, you and your spouse can each contribute up to $5,500 into a traditional IRA or Roth IRA next year, as long as your combined wages and net self-employment income exceeds the total amount contributed. Anyone 50 or older can contribute an extra $1,000, increasing the total allowable contribution to $6,500. You have until April 15, 2015 to contribute to your IRAs for 2014.
There is a bit of good news for people looking to contribute to a Roth IRA in 2014. 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 single individuals and $3,000 for joint filers 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 $181,000 - $191,000, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2014 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 2013 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2014.
2014 Maximum Retirement Account Contributions
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