by The MDTAXES Network | Nov 27, 2013 | Uncategorized
Each year, the government bumps up the maximum Social Security taxes that you can pay. For 2014, the maximum wage base jumps to $117,000, an increase of $3,300, or 2.8%, over the max of $113,700 that was in place for 2013.
The Social Security Administration predicts that 10 million individuals will end up paying higher taxes due to this increase, out of the estimated 165 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 $7,254. This is $205 higher than the 2013 max of $7,049.
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.
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 $113,700 in 2013, 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 2013 and Earn More Than $113,700?
For 2013, each of your employers withholds social security taxes from the first $113,700 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.
For Example:
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 2013 is limited to $7,049, the excess of $2,251 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 2013 |
$7,049.00 |
| E) ? Excess social security taxes withheld (C-D) |
$2,251.00 |
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 2014 Social Security Changes.
FYI: The social security wage base has been increased each year. The wage base maximum has been increased as follows:
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
by The MDTAXES Network | Jun 13, 2013 | Planning, Taxes, Uncategorized
Tax hikes in 2013 mean it’s time to revisit available tax breaks.
Effective 1/1/13, taxes increased for many well-paid Americans. Here are three separate tax hikes that might affect you:
- Top federal income tax rate now 39.6%
- Top Medicare tax on earned income now 3.8%
- New 3.8% Medicare tax on unearned income
Beginning on January 1, 2013, The American Taxpayer Relief Act raised the top federal marginal income tax rates from the 35% max in place since the Bush 2003 tax cuts to 39.6% for taxable income exceeding the following thresholds:
Threshold for 39.6% Bracket:
|
Filing Status
|
Tax Bracket Starts
(at taxable income)
|
|
Married Filing Joint
|
$450k
|
|
Head of Household
|
$425k
|
|
Single
|
$400k
|
|
Married Filing Separate
|
$225k
|
So how much more federal income taxes could you expect to pay this year due to the 39.6% bracket? Single individuals with taxable income of $600k will pay the federal government an additional $9,200. Earn $400k more to bring your taxable income to $1 million, and the additional taxes you’ll owe jumps to $27,600. Let’s look at the increases based on the four filing statuses:
Additional Taxes Starting in 2013
|
Taxable income
|
Single
|
Head of Household
|
Married Filing Joint
|
Married Filing Separate
|
|
$600,000
|
$9,200
|
$8,050
|
$6,900
|
$17,250
|
|
$800,000
|
$18,400
|
$17,250
|
$16,100
|
$26,450
|
|
$1,000,000
|
$27,600
|
$26,450
|
$25,300
|
$35,650
|
Increased Tax Rate on Long-Term Capital Gains and Corporate Dividends
The top tax bracket was not the only increase to federal income taxes. For long-term capital gains and qualified corporate dividends, the tax rate increases by one-third – from 15% to 20% – based on the same taxable income thresholds as apply the 39.6% bracket, effective 1/1/13.
Higher Medicare Taxes:
There are two new increases to the Medicare tax. One upped the Medicare tax that you’ll pay on your earned income from 1.45% to 2.25% for single individuals earning more than $200k or married couples whose combined earned income exceeds $250k. Keep in mind that your employer will match Medicare taxes withheld from your pay at a rate of 1.45%, so the federal government now gets 3.8% on your earned income that exceeds the applicable threshold.
Increased Medicare Tax
|
Filing Status
|
3.8% Tax Starts
(Earned income)
|
|
Married Filing Joint
|
$250k
|
|
Single
|
$200k
|
New 3.8% Medicare Tax On Unearned Income:
The new 3.8% Medicare tax on unearned income kicks in at the $200k of Adjusted Gross Income (AGI) for single individuals and $250k of AGI for married couples. Unearned income includes interest, dividends, capital gains, annuities, royalties, and rents. This is the first time that unearned income has ever been subject to Medicare taxes.
Tax Rates for Capital Gains and Qualified Dividends ? 2012 vs 2013
|
Single
|
Married Filing Jointly
|
Capital Gains and Qualified Dividends -2012 rates
|
Capital Gains and Qualified Dividends -2013 rates
|
Increase in Tax Rates on Investments 2012 vs 2013
|
|
$0 – $36,250
|
$0 – $72,500
|
0%
|
0%
|
0%
|
|
$36,250 – AGI of $200,000
|
$72,500 – AGI of $250,000
|
15%
|
15%
|
0%
|
|
$200,000 – taxable income of $400,000
|
$250,000 – taxable income of $450,000
|
15%
|
18.8%
|
3.8%
|
|
$400,000+
|
$450,000+
|
15%
|
23.8%
|
8.8%
|
by The MDTAXES Network | Nov 15, 2012 | Savings, Taxes
Each year, the government bumps up the maximum Social Security taxes that you can pay. For 2013, the maximum wage base jumps to $113,700, an increase of $3,600, or 3.3%, over the max of $110,100 that was in place for 2012.
The Social Security Administration predicts that 10 million individuals will end up paying higher taxes due to this increase, out of the estimated 163 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 $7,049. This is $2,425 higher than the 2012 max of $4,624. Remember, the rate for the employee portion of the Social Security tax was reduced to 4.2% for 2011 only, and was then extended through 2012. Not only will high-income individuals pay Social Security taxes on an extra $3,600 in 2013, they, like all workers paying into the system, will also do so at a higher rate.
Higher Medicare Taxes Due To The Affordable Care Act:
As we wrote in?August, on June 28th, 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.
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 10.4% 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 $110,100 in 2012, 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 2012 and Earn More Than $110,100?
For 2012, each of your employers withholds social security taxes from the first $110,100 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.
For Example:
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 * 4.2%). Employer #2 also withholds $3,150 in social security taxes – for a total of $6,300 in social security taxes withheld during the year. Since the maximum social security taxes that you should pay through payroll withholdings for 2012 is limited to $4,624, the excess of $1,814 counts as additional federal income taxes paid in by you.
| A) Social security taxes withheld by Employer #1 |
$3,150.00 |
| B) Social security taxes withheld by Employer #2 |
$3,150.00 |
| C) Total social security taxes withheld during the year (A+B) |
$6,300.00 |
| D) Social security max for 2012 |
$4,624.00 |
| E) Excess social security taxes withheld (C-D) |
$1,676.00 |
www.ssa.gov
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. The wage base maximum has been increased as follows:
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
by The MDTAXES Network | Oct 5, 2012 | Taxes
On June 28th, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act. Here are some of the tax increases that might affect you starting in 2013:
Increased and Expanded Medicare Taxes
High-income taxpayers will be paying higher Medicare taxes. Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work. Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out. And unlike Social Security taxes which max out at $110,100 (in 2012), there is no cap for Medicare taxes. Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.
Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62% – 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 match is slated to remain at 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.
For more information, check out the IRS’s Questions and Answers for the Additional Medicare Tax, which explains: The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee?s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual?s income tax return (Form 1040).
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. We’ll provide you a link to this form when it becomes available.
Reduced Tax Breaks for Medical Expenses
Many employers offer their staff the ability to pay for their family’s healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package. Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year. Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications. Please note, if you are married, both you and your spouse can put away the full $2,500 through your respective employer’s FSA.
The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses. Starting in 2013, you can only deduct your family’s medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income. That’s an increase of one-third over today’s threshold of 7.5% of AGI.
This new rule may not impact your taxes, however, thanks to the dreaded Alternative Minimum Tax (AMT). Since the current threshold for deducting medical expenses under the AMT is already 10% of Adjusted Gross Income (AGI), many people who are hit by this tax every year might not see any tax increase due to this change.
Steps to Consider to Minimize These Taxes:
As with most other tax rules, there are ways to minimize the tax bite that will be caused by soon to be implemented changes to the Tax Code:
- Take a look at a Health Savings Account for your family.?? Money contributed into an HSA is tax-deductible, and money withdrawn for your family’s medical expenses is tax-free. We wrote about HSAs in our?MDTAXES? May 2012?Newsletter.
- Consider?selling appreciated investments in 2012 if you would otherwise sell them in 2013. No one know whether the tax rate on long-term capital gains will be higher than 15% in 2013. Add to this the 3.8% Medicare tax you’ll pay once your income exceeds $200k if single or $250k if married, and you could save a decent amount of taxes by selling by December 31st.
- Consider accelerating income into 2012 to reduce your 2013 income. This strategy includes one-time income generators, such as Roth Conversions.
by The MDTAXES Network | Aug 15, 2012 | Taxes
On June 28th, the Supreme Court upheld most of the provisions of The Patient Protection and Affordable Care Act. Here are some of the tax increases that might affect you starting in 2013:
Increased and Expanded Medicare Taxes
High-income taxpayers will be paying higher Medicare taxes. Under the current rules, individuals have Medicare taxes withheld from their salaries at a rate of 1.45% on each dollar earned at work. Since employers match the amount withheld, Medicare receives a total of 2.9% for each payroll dollar paid out. And unlike Social Security taxes which max out at $110,100 (in 2012), there is no cap for Medicare taxes. Self-employed individuals also pay Medicare taxes at a rate of 2.9% on all of their net earnings.
Starting in 2013, the employee portion of the Medicare tax jumps by a whopping 62% – 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 match is slated to remain at 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.
For more information, check out the IRS’s Questions and Answers for the Additional Medicare Tax, which explains:
The statute requires an employer to withhold Additional Medicare Tax on wages or compensation it pays to an employee in excess of $200,000 in a calendar year. An employer has this withholding obligation even though an employee may not be liable for the Additional Medicare Tax because, for example, the employee?s wages or other compensation together with that of his or her spouse (when filing a joint return) does not exceed the $250,000 liability threshold. Any withheld Additional Medicare Tax will be credited against the total tax liability shown on the individual?s income tax return (Form 1040).
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. We’ll provide you a link to this form when it becomes available.
Reduced Tax Breaks for Medical Expenses
Many employers offer their staff the ability to pay for their family’s healthcare costs with pre-tax dollars through a Flexible Savings Accounts (FSA) included as part of their benefits package. Starting in 2013, the maximum amount of money that you can set aside in an FSA will be cut in half to $2,500 per year. Plus, medical expenses you can pay through the FSA will exclude certain items currently allowed, including OTC medications. Please note, if you are married, both you and your spouse can put away the full $2,500 through your respective employer’s FSA.
The Patient Protection Act also makes it even tougher for individuals to deduct their medical expenses. Starting in 2013, you can only deduct your family’s medical expenses to the extent the allowable expenses exceed 10% of your adjusted gross income. That’s an increase of one-third over today’s threshold of 7.5% of AGI.
This new rule may not impact your taxes, however, thanks to the dreaded AMT. Since the current threshold for deducting medical expenses under the AMT is already 10% of AGI, many people who are hit by this tax every year might not see any tax increase due to this change.
Steps to Consider to Minimize These Taxes:
As with most other tax rules, there are ways to minimize the tax bite that will be caused by soon to be implemented changes to the Tax Code:
- Take a look at a Health Savings Account for your family. Money contributed into an HSA is?tax-deductible, and money withdrawn for your family’s medical expenses is?tax-free (we wrote about HSAs in May 2012).
- Consider selling appreciated investments in 2012 if you would otherwise sell them in 2013. No one know whether the tax rate on long-term capital gains will be higher than 15% in 2013. Add to this the 3.8% Medicare tax you’ll pay once your income exceeds $200k if single or $250k if married, and you could save a decent ???? amount of taxes by selling by December 31st.
- Consider accelerating income into 2012 to reduce your 2013 income. This strategy includes one-time income generators, such as Roth Conversions.
