Tax & Financial Planning Calendar for November, 2017
|Month||Income Taxes||Saving and Investing|
|Month||Income Taxes||Saving and Investing|
The?maximum annual contribution?to your?IRA?is?$5,500 for 2015 through 2018.? And if you turn 50 by December 31st, you can contribute an extra $1,000 that year.? You have until April 15, 2018 to make your 2017 IRA contributions.
These days, most 401k and 403b plans give their participants the option of contributing to the “traditional” version or the “Roth” version.
With the traditional version, the amount you contribute reduces your taxable income in the current year, and then you pay taxes on distributions down the road.
With the Roth version, you forego a current year break in exchange for a promise from the federal government that withdrawals from that account won’t be taxed when taken out upon reaching retirement age.
With these accounts, unless you are paying no federal income taxes or are in one of the lowest few brackets, my advice is simple:
If going with the Roth version of the 401k or 403b plan for your salary deferrals, and you won’t able to hit the annual max of $18k ($24k if 50 or older) in 2017 or $18.5k ($24.5k if 50 or older) in 2018, then opt for the traditional version and use the taxes you’ll save to increase your salary deferrals.
I believe that your initial goal is to put away the maximum allowable amount into your retirement account at work each year.? With old fashioned pension plans not very common any more and Social Security a huge question mark, it’s up to you to put away enough money to fund a comfortable retirement.? Taking advantage of the tax savings for the traditional 401k plan to put away more money each year seems to be the prudent way to go.
Once you can hit that annual max, you can decide whether saving taxes today or saving taxes in the future is more valuable to you and your family
Contributing to a retirement plan is one of the best tax shelters available to you during your working years.? Recently, the IRS announced that some of the retirement savings limits will increase for 2018.
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 2018, you can contribute up to $18,500 into a 401(k) or 403(b) plan through salary deferrals, up from $18,000 in 2017.
Looking to set your 2018 monthly budget?? To max out your 401(k) or 403(b) salary deferrals next year, instruct your employer to withhold $1,541.67 per month from your pay.
Catch-up contributions remain at $6,000 for 2018.? Anyone 50 or older by December 31, 2018 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 $24,500, or $2,041.67 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 2018, 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 2018, for a total annual salary deferral of $15,500, unchanged from 2017.? 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 2018 is $55,000, or $4,583.33 per month, up from $54,000 in 2017.
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 $55,000.? If you’re 50 or older, your maximum contribution into a Solo 401(k) jumps to $61,000, or $5,083.33 per month.? You have until December 31st to set up a Solo 401k for 2017.
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 $275,000 for 2018, up from $270,000? in 2017.
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 2018, 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 and $3,000 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 2018 phase-out range for your spouse making a deductible IRA contribution has increased to $189,000 – $199,000, which is identical to the Roth IRA phase-out limits.
Re-Set Your 2018 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 2017 winding down, now’s the time to start thinking about resetting your monthly retirement savings goals for 2018.
2018 Maximum Retirement Account Contributions:
Retirement Savings Option
|Under the age?of 50||50 or older by December 31st|
401(k) or 403(b) deferrals?
SIMPLE IRA deferrals?
Solo 401(k) ?
|IRA or Roth IRA?||$5,500
Most years, the government bumps up the maximum Social Security taxes that you can pay. ?For 2018, the maximum wage base jumps to $128,700, an increase of $1,500, or 1.2%, over the max of $127,200 that was in place for 2017.
The Social Security Administration predicts that 12 million individuals will end up paying higher taxes due to this increase, out of the estimated 175 million workers who will pay Social Security taxes next year.
At a rate of 6.2%, the maximum Social Security taxes that your employer will withhold from your salary is $7.979.? This is $93 higher than the 2017 max of $7,886.
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 $127,200 in 2017, 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 2017 and Earn More Than $127,200?
For 2017, each of your employers withholds social security taxes from the first $127,200 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 2017 is limited to $7,886, the excess of $1,414 counts as additional federal income taxes paid in by you.
|A) Social security taxes withheld by Employer #1||$4,650.00|
|B) Social security taxes withheld by Employer #2||$4,650.00|
|C) Total social security taxes withheld during the year (A+B)||$9,300.00|
|D) Social security max for 2017||$7,886.00|
|E) Excess social security taxes withheld (C-D)||$1,414.00|
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 2018 Social Security Changes.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
2018 wage base max: $128,700
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