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MONTHLY TAX NEWSLETTERNovember 2016
On October 27th, the IRS announced the cost of living adjustments applicable to the various retirement plan limitations for 2017. Unfortunately, for the second year in a row, the bulk of the retirement savings limits will not increase from 2015 levels.
No Increases for 2017
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 and 2016, you can contribute up to $18,000 into a 401(k) or 403(b) plan through salary deferrals in 2017.
Anyone 50 or older by December 31, 2017 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 for the prior two years. Please note that you don't need to actually wait until your 50th birthday to be able to start making these catch-up contributions, so adjust your deferrals as of the first paycheck of that monumental year.
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 2017, the maximum contribution into your SIMPLE as salary deferrals remains at $12,500. Anyone 50 or older by December 31st can sock away an additional $3,000 in 2017, for a total annual salary deferral of $15,500, unchanged from 2016. Your employer will generally make matching contributions into your account of up to 3% of your salary.
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 2017 increases by $1,000 to $54,000. Solo 401k's allow self-employed individuals to hit the $54k max on less income, and increases the max for people 50 and over to $60k.
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, 2018 to contribute to your IRAs for 2017.
There is a bit of good news for people looking to contribute to a Roth IRA in 2017. The amount you can earn and still contribute to a Roth did increase by $1,000 for single individuals and $2,000 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 $186,000 - $196,000 for 2017, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2017 Retirement Savings 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 2016 winding down, now's the time to start thinking about resetting your monthly retirement savings goals for 2017.
2017 Maximum Retirement Account Contributions
years, the government bumps up the maximum Social Security taxes
that you can pay.
For 2017, the maximum wage base jumps to
$127,200, an increase of $8,700, or 7.3%, over the max of
$118,500 that was in place for 2015 and 2016.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $7.886. This is $539 higher than the 2016 max of $7,347.
Why such a big increase this year? According to the Social Security Administration, the annual change is based on the National Wage Index.
However, there is an exception built into the rules that the Wage Base doesn't increase in any years that Benefits don't increase. That is why the wage base remained at $118,500 for the prior two years, even through the National Wage Index increased from September 2014 to September 2015. This year, we are absorbing two years of increases to the index.
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. This tax is reported on the Form 8959.
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. This tax is reported on the Form 8960.
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 2016, 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 2016 and Earn More Than $118,500?
For 2016, 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 2016 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, or learn about what's new for the 2017 Social Security Changes.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
2017 wage base max:
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