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.
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
|B) ? Social security taxes withheld by Employer #2
|C) ? Total social security taxes withheld during the year (A+B)
|D) ? Social security max for 2013
|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 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
[Editor’s Note] I started my career as a CPA specializing in taxes back in 1987, and right off the bat had to deal with the massive Tax Reform Act of 1986. Since that complicated set of tax rules was implemented more than 25 years ago, all I’ve seen is more and more complex tax rules enacted at an increasingly quick rate. Whether you’re a taxpayer or a tax advisor, there is barely even enough time to digest one set of rules before the next set is forced upon us. To make things more challenging, none of the old rules ever seem to be taken away as these new rules are enacted.
Well, the Affordable Care Act gives us all a bunch of new rules affecting our taxes, including a new Health Insurance Premium Tax Credit. Check out these Questions and Answers on the Premium Tax Credit provided by our friends at the IRS.
By Michael Bohigian, EA
The American Taxpayer Relief Act of 2012 rescued the vast majority of Americans from the tax edge of the ?fiscal cliff? and the steep tax increases scheduled to kick in as the Bush tax cuts expired at the end of 2012. This legislation, however, did not entirely spare high-income earners. Here are the key provisions of the Act passed on the first day of 2013, how they may affect you, and strategies you can implement to minimize your tax burden under these new rules:
On The Income Side:
Top Marginal Rate Increases to 39.6%
Beginning on January 1, 2013, the Act raises the top federal marginal income tax rates from the 35% max in place since the Bush tax cuts to 39.6% for taxable income above the following thresholds: $400,000 for Single filers; $425,000 for Heads of Household; $450,000 for Married Filing Jointly and qualifying surviving spouses; and $225,000 for those Married Filing Separately. Translating this provision into real numbers, a married couple with $600k of taxable income will now pay just under $7,000 in additional federal income taxes in 2013 than they did in 2012, while an individual earning at the same income level will pay just over $9,000 more in federal income taxes.
Increase in Federal Income Taxes For 2013 Due To The 39.6% Tax Rate
||Head of Household
||Married Filing Joint
||Married Filing ? Separate
New Investment Tax Rates
Starting in 2013, the top tax rate for dividends and capital gains is permanently set at 20%, a whopping one-third increase from the top rate of 15% in place since 2003, starting at the same income levels as the 39.6% tax rates. The tax rate for dividends was set to revert to one?s marginal tax rate per the pre-2003 Bush rules, so the Act provides some relief to high-wage earners with substantial corporate dividend income.
Keep in mind that the Affordable Care Act enacted an additional Medicare tax of 3.8% on unearned income for married couples with adjusted gross income (AGI) over $250,000 and individuals with AGI over $200,000, effective January 1, 2013. Unearned income includes interest, dividends, capital gains, annuities, royalties, and rents.
Tax Rates for Capital Gains and Qualified Dividends ? 2012 vs 2013
||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
|$36,250 – AGI of ? $200,000
||$72,500 – AGI of ? $250,000
|$200,000 – taxable ? income of $400,000
||$250,000 – taxable ? income of $450,000
If you?re concerned about paying higher taxes on the sale of your personal residence, please note that the first $500,000 of gain on your home for a married couple and $250,000 of gain for unmarried individuals is exempt from all taxes, including this 3.8% Medicare surtax, when your home qualifies for the residence gain exclusion. To qualify, you need to own your home and use it as your primary residence for two out of the five years prior to the date the home is sold.
Stay tuned for Part 2 – What’s Being Deducted from your Deductions
Michael Bohigian, EA, is a staff accountant atSchwartz & Schwartz PC with a MS in Accounting and an MBA from Boston College.
Owners of medical and dental practices beware! Due to a provision included in the Affordable Care Act, the cost of medical devices is set to increase by 2.3% on January 1, 2013.
Called an Excise Tax, manufacturers are required to collect a COST OF tax equal to 2.3% of the sales price of each piece of equipment sold, and then remit that tax to the federal government. Unless the manufacturer decides to reduce their prices by 2.3%, expect to pay more for your purchases of medical devices starting in 2013.
Let’s say you purchase a medical device for $10,000. As of January 1, 2013, your cost for that equipment will be $10,230. Make capital expenditures of $100,000 for your practice, and you’ll pay an extra $2,300 for that equipment starting next year.
Here is some information provided by our friends at the IRS regarding this new? tax:
The following questions and? answers provide general information on the medical device excise tax. For more? detailed information see the proposed? regulations issued on Feb. 3, 2012.
Q. What is the? medical device excise tax?
A. The medical? device excise tax is a tax on the sale of certain medical devices by the? manufacturer, producer or importer of the device.
Q. When does the tax? go into effect?
A. The tax? applies to sales of taxable medical devices by the manufacturer or importer? after December 31, 2012.
Q. How much is the? tax?
A. The tax is? 2.3-percent of the price for which the manufacturer or importer sells the? taxable medical device.
Q. Who is responsible? for reporting and paying the medical device excise tax?
A. The? manufacturer or importer of a taxable medical device is responsible for? reporting and paying the tax.
Q. Will individual? consumers be subject to any reporting or recordkeeping requirements?
A. No action is? required by individual consumers.
Q. What form will be? used to report the medical device excise tax?
A. The medical? device excise tax is a manufacturers excise tax. Manufacturers excise taxes are? reported on Form? 720, Quarterly Federal Excise Tax Return.
Q. I?m not familiar? with manufacturers excise taxes. Where can I learn more?
A. For more? information about manufacturers excise taxes in general, see Chapter 5 of IRS Publication 510, Excise Taxes.
Q. Has the IRS issued? guidance on the medical device excise tax?
A. The IRS and? the Treasury Department issued proposed regulations on February 3, 2012. The IRS? and the Treasury Department welcome comments on the proposed regulations.
We’ll post Part 2 of this series tomorrow.