Most years, the government bumps up the maximum Social Security taxes that you can pay. ?For 2019, the maximum wage base jumps to $132,900, an increase of $4,500, or 3.5%, over the max of $128,400 that was in place for 2017.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $8,240.? This is $279 higher than the 2018 max of $7,961.
How is this increase calculated?? According to the Social Security Administration, the annual change is based on the National Wage Index.
Higher Medicare Taxes Due To The Affordable Care Act:
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 (except for when you rent office space you own to your practice) 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 $128,400 in 2018, 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 2018 and Earn More Than $128,400?
For 2018, each of your employers withholds social security taxes from the first $128,400 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 $100,000 from each employer. Employer #1 withholds $6,200 in social security taxes ($100,000 * 6.2%). Employer #2 also withholds $6,200 in social security taxes – for a total of $12,400 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2018 is limited to $7,961, the excess of $4,439 counts as additional federal income taxes paid in by you.
|A) Social security taxes withheld by Employer #1
|B) Social security taxes withheld by Employer #2
|C) Total social security taxes withheld during the year (A+B)
|D) Social security max for 2018
|E) Excess social security taxes withheld (C-D)
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 2019 Social Security Changes.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
2019 wage base max: $132,900
2018 wage base max: $128,400
2017 wage base max: $127,200
2015 & 2016 wage base max: $118,500
2014 wage base max: $117,000
2013 wage base max: $113,700
2012 wage base max: $110,100
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
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 2019.
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 2019, you can contribute up to $19,000 into a 401(k) or 403(b) plan through salary deferrals, up from $18,500 in 2018.
Looking to set your 2019 monthly budget?? To max out your 401(k) or 403(b) salary deferrals next year, instruct your employer to withhold $1,583.33 per month from your pay.
Catch-up contributions remain at $6,000 for 2018.? Anyone 50 or older by December 31, 2019 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 $25,000, or $2,083.33 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 2019, the maximum contribution into your SIMPLE as salary deferrals increases by $500 to $13,000.? Anyone 50 or older by December 31st can sock away an additional $3,000 in 2019, for a total annual salary deferral of $16,000, up $500 from 2018.? Your employer will generally make matching contributions into your account of up to 3% of your salary.
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 2019 is $56,000, or $4,666.67 per month, up from $55,000 in 2018.
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 $56,000.? If you’re 50 or older, your maximum contribution into a Solo 401(k) jumps to $62,000, or $5,166.67 per month.? You have until December 31st to set up a Solo 401k for 2018.
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 $280,000 for 2019, up from $275,000? in 2018.
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 $6,000, or $500 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 $7,000, or $583.33 per month.
In addition to the contribution limits increasing by $500 for 2019, there is a little more 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 and $4,000 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.
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 2019 phase-out range for your spouse making a deductible IRA contribution has increased to $193,000 – $203,000, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2019 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 2018 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2019.
2019 Maximum Retirement Account Contributions
Retirement Savings Option
|Under the age
|50 or older by December 31st
401(k) or 403(b) deferrals
SIMPLE IRA deferrals
IRA or Roth IRA
Earlier this year, the IRS released a draft of the 2018 Schedule A, Itemized Deductions form.? Let’s review the rules for itemizing your deductions for 2018:
For 2018, and only for 2018, medical expenses are deductible to the extent they exceed 7.5% of your Adjusted Gross income (AGI). Staring 1/1/19, the threshold reverts to 10% of AGI.
Planning Opportunity:? Check out IRS Publication 502, Medical and Dental Expenses.? If your allowable medical expenses will exceed 7.5% of your AGI this year, then paying your outstanding medical and dental bills prior to 12/31/18 will increase the allowable deduction.? Same goes for pre-paying for medical expenses even if the services won’t be provided until next year.
Home Mortgage Interest
Big changes with the deductibility of home mortgage interest:
Interest on a total of up to $1 million of pre-12/14/17 outstanding debt on your primary residence and a second home is fully deductible.
New mortgages debt (excluding refinancing of pre-12/14/17 mortgages) taken after 12/14/17 limited to $750k for this deduction.
Interest on home equity debt used to improve the residence securing the debt is still deductible subject to the $1 million and $750k limits above.
All other home equity loans no longer qualify for the mortgage interest deduction.
Planning Opportunity:? Read the IRS’ explanation of the new rules for deducting mortgage interest and home equity loan interest and consider refinancing outstanding debt accordingly, but only if the current interest rates permit. You might also consider claiming the home office deduction to write off a portion of your mortgage interest and real estate taxes that are now non-deductible under the new rules.
The new rules increased the amount of charitable donations you can make and deduct each year to 60% of your AGI, up from 50% based on the pre-1/1/18 rules.
Planning Opportunity:? Consider donating appreciated securities to a charity since you don’t pay taxes on the appreciation but can still write off the full value of the securities donated.? You might also consider setting up and funding a Donor Advised Fund to frontload the tax deduction on your donations while still allowing you to disburse the contributions to the charities over a number of years.
Miscellaneous Itemized Deductions
Investment management fees, tax prep fees, and unreimbursed employee business expenses are no longer deductible effective 1/1/18.
Planning Opportunity😕 Consider claiming these expenses if possible against your business income reported on your Schedule C, rental income on the Schedule E, page 1, or partnership income on Schedule E, page 2.
Non-business casualty losses are now only deductible if the loss occurs in a Presidentially declared disaster area. Personal casualty losses and theft losses are no longer deducible as of 1/1/18.
Tougher To Itemize in 2018
With a $24k standard deduction and state and local taxes (SALT), including real estate taxes, limited to just $10k annually, married couples without a large mortgage might find themselves struggling to itemize their deductions under the new tax rules. Unmarried individuals can also deduct $10k in SALT taxes but have a standard deduction of just $12k, so will have a much easier time to itemize just by owning a home, having significant medical expenses, or donating a few thousand dollars to charity each year.
Planning Opportunity:? Married couples might save some taxes by bunching their deductions every other year.
Phase-out of the Phase-out
Here is one last bit of good news. The new tax rules eliminate the phase-out of itemized deductions starting 1/1/18.? Previously, high income taxpayers saw that their itemized deductions began to be phased-out once their income exceeded $313,800 if married or $287,650 if single.
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