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MONTHLY TAX NEWSLETTERNovember 2015
On October 21st, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations for 2016. Unfortunately, the bulk of the retirement savings limits will not increase from 2015.
According to the October 21st announcement made by the IRS on 2016 Pension Plan Limitations, "In general, the pension plan limitations will not change for 2016 because the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment. However, other limitations will change because the increase in the index did meet the statutory thresholds."
No Increases for 2016
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 2015, you can contribute up to $18,000 into a 401(k) or 403(b) plan through salary deferrals in 2016.
Anyone 50 or older by December 31, 2016 can 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. That is the same as what was allowed during 2015.
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 2016, the maximum contribution into your SIMPLE remains at $12,500. Anyone 50 or older by December 31st can sock away an additional $3,000 in 2016, for a total annual contribution of $15,500, unchanged from 2015.
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 2016 remains the same at $53,000.
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, 2017 to contribute to your IRAs for 2016.
There is a bit of good news for people looking to contribute to a Roth IRA in 2016. The amount you can earn and still contribute to a Roth did increase by $1,000 for single individuals and 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 $184,000 - $194,000 for 2016, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2016 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 2015 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2016.
2016 Maximum Retirement Account Contributions
For just the third 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). The period of consideration includes the third quarter of the last year a cost-of-living adjustment (COLA) was made to the third quarter of the current year. As determined by the Bureau of Labor Statistics, there was no increase in the CPI-W from the third quarter of 2014 to the third quarter of 2015. Therefore, under existing law, there can be no COLA in 2016." explains the Social Security Administration. For a complete list of the 2016 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 steady at $7,347.
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 $118,500 in 2015, 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 2015 and Earn More Than $118,500?
For 2015, each of your employers withholds social security taxes from the first $118,500 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 2015 is limited to $7,347, the excess of $1,953 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, 2011 and 2016. The wage base maximum has been increased as follows:
2015 & 2016 wage base max:
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