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MONTHLY TAX NEWSLETTERNovember 2014
Contributing to a retirement plan is one of the best tax shelters available to you during your working years. Recently, the IRS announced that many of the retirement savings limits will increase for 2015.
Employer Sponsored Plans
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. For 2015, you can contribute up to $18,000 into a 401(k) or 403(b) plan through salary deferrals, up from $17,500 in 2014.
Looking to set your 2015 monthly budget? To max out your 401(k) or 403(b) salary deferrals next year, instruct your employer to withhold $1,500 per month from your pay.
Catch-up contributions increased by $500 for 2015. Anyone 50 or older by December 31, 2015 can now contribute an extra $6,000 into their 401(k) or 403(b) plan through salary deferrals next year, for a total annual contribution of $24,000, or $2,000 per month.
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 2015, the maximum contribution into your SIMPLE increases by $500 to $12,500, or $1,041.67 per month. Anyone 50 or older by December 31st can sock away an additional $3,000 in 2015, for a total annual contribution of $15,500, or $1,291.67 per month.
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 for 2015 is $53,000, or $4,416.67 per month, up from $52,000 in 2014.
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 $53,000. If you're 50 or older, your maximum contribution into a Solo 401(k) jumps to $59,000, or $4,916.67 per month. You have until December 31st to set up a Solo 401k for 2014.
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 $265,000 for 2015, up from $260,000 in 2014.
Don't forget about IRAs. Even if you're covered under a retirement plan at work, you and your spouse can each contribute up to $5,500, or $458.33 per month, 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, or $541.66 per month.
Even though the contribution limits didn't increase for 2015, there is a little good news for people looking to contribute to a Roth IRA . The amount you can earn and still contribute to a Roth has increased by $2,000 for single individuals as well as for married couples, as follows:
If your income is too high for a Roth, don't forget that the rules changed a few years back, 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 or Keep on Converting in 2011 and Beyond, available in our March 2011 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 2015 phase-out range for your spouse making a deductible IRA contribution has increased to $183,000 - $193,000, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2015 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 2014 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2015.
2015 Maximum Retirement Account Contributions
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year, the government bumps up the maximum Social Security taxes
that you can pay.
For 2015, the maximum wage base jumps to
$118,500, an increase of $1,500, or 1.3%, over the max of
$117,000 that was in place for 2014.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $7,347. This is $93 higher than the 2014 max of $7,254.
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 $117,000 in 2014, 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 2014 and Earn More Than $117,000?
For 2014, each of your employers withholds social security taxes from the first $117,000 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 2014 is limited to $7,254, the excess of $2,046 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 2015 Social Security Changes.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
2015 wage base max:
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