Wednesday, December 19, 2007


As the questions are beginning to pile up I have decided to respond to two (2) ASK THE TAX PRO submissions this week.

Q. I don't know if this is a question you can answer but maybe you can direct me to where I can find out.

My question is: Why is there a limit on wages subject to Social Security withholding? My wife cannot understand why there is any limit at all. I know that the small Medicare portion has no limit. Just wondering if there even is an answer to this question.

Appreciate any help you can give me so I can give my wife an intelligent answer other than that the Government can do anything they want!!

A. I don’t know that the government can do anything they want – there are Constitutional and legislative guidelines and parameters.

There have always been limits on the amount of wages subject to Social Security withholding. The same wage limit used to also apply to the Medicare portion of the “FICA” tax.

When Social Security began in 1937 the maximum earnings subject to the combined FICA tax was $3,000, and the tax rate paid by the employee was only 1%. The tax rate was raised to 1.5% in 1950, but the $3,000 wage threshold remained.

When I first started doing payroll in 1976 the wage base was $15,300 and the FICA tax rate was 5.85% - 4.95% for Social Security and .9% for Medicare. Back then most full-time employees maxed out on FICA and got a small “raise in pay” toward the end of the year.

The earnings cap went up a couple of thousand per year, indexed for inflation since the early 1970s. By 1980 the maximum earnings had grown to $25,900 and the tax rate was 6.13%. In 1990 the earnings base was $51,300 and the employee (and employer) FICA tax rate became 7.65% - 6.2% for Social Security and 1.45 % for Medicare - which it still is today. By 2000 the wage threshold was $76,200.

In 1991 the “Revenue Reconciliation Act of 1990" separated the Medicare wage limit from the Social Security wage limit and increased it to $125,000. It went to $135,000 in 1993. The “Omnibus Budget Reconciliation Act of 1993” repealed the Medicare wage cap altogether. Since 1994 the Medicare portion of the FICA tax has been applied to all wages, without limitation.

For 2008 the maximum amount of wages subject to Social Security tax will be $102,000.

There has been talk over the past few years of repealing the Social Security wage limit – but nothing has been done.

I hope this will satisfy your wife.

This next question was originally submitted as a comment to my post on
ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC. However I felt my reply as a responding comment would be “lost”, so I decided to use it as an “official” ASK THE TAX PRO question.

Q. I have a question if you don't mind.

In 2004 I had a Louisiana driver’s license and my family’s home address was in Louisiana. However, I worked in Florida the entire year and earned my income there. Of course Florida has no state income taxes. Now Louisiana is telling me I need to file for 2004, and that I owe them money.

I'm told you only pay taxes to the state you earned the income in. Does LA have a right to claim money from me? Other than my W-2's I can't prove that I was in Florida, or is that all I need? And of course by this time there's penalties and interest that put it up to about $900!

What should I do?

A. First – I am not familiar with Louisiana tax law or Louisiana state tax returns. I seem to recall doing a Louisiana state return for a member of the cast of the off-Broadway show ONE MO’ TIME, a Louisiana state resident performing in NYC – but that was about 25 years ago! However, the general concept of residency for taxation purposes is similar in most states.

It is not true that you only pay taxes to the state in which you earned the income. You first pay taxes to the state in which you work and earned the money. If you are not a resident of that state, you also pay taxes to your state of residency. You get a credit on your resident state tax return for taxes paid on the same income to the non-resident state. For example, a NJ resident who works in NY first pays NY state income tax on the earnings. The earnings are also reported on the NJ resident income tax return, and a credit it taken on the NJ-1040 for the tax paid to NY using a specific formula. A nonresident is only taxed on income earned in the nonresident state, while a resident is taxed on all income earned from all sources.

One problem you face is that you did not pay state income taxes to Florida, and so cannot claim a credit on a Louisiana resident return.

In New Jersey you are considered a full-year resident if –

· New Jersey was your “domicile” (permanent legal residence) for the entire year, or

· New Jersey was not your domicile, but you maintained a permanent home in New Jersey for the entire year and you spent more than 183 days (i.e. more than half of the 365 days of the year) in New Jersey.

A permanent residence, or domicile, is considered to be the place to which you intend to return after a period of absence (a vacation, a temporary business assignment, education, etc).

The first question I would ask is what was the reality of the situation regarding your residence and work in Florida? Did you move from Louisiana to Florida with the intent of moving your domicile and living and working in Florida? Or did you accept a temporary job in Florida, all the while expecting to return to Louisiana when the temporary job was over? Was the reason you were in Florida the fact that you were in college there, and worked part-time locally while a full-time student? Or did you graduate from college in Florida and decide to stay there?

Second, from which address did you file your 2004 federal income tax return?

Louisiana certainly has the right to ask you for taxes if they consider you to were a Louisiana resident. It is up to you to prove that you were a legitimate Florida resident for 2004.

One way to determine your true domicile is where you receive your mail, where you maintain a driver’s license, where you are registered to vote, etc.

If you worked in Florida in 2004 and moved back to Louisiana in 2005 (and were not a full-time college student in Florida in 2004) it does not mean that you were not a legitimate Florida resident for 2004. It is possible that you intended to move your domicile to Florida, but after a period of time you determined you could not find a proper job, or you were offered a better job back in Louisiana, or a family situation required your return, or you simply did not like living in Florida.

The bottom line is you have to prove to Louisiana that your permanent legal residence, or domicile, for 2004, or at least for the period of your employment, was in Florida. Your W-2 is a start. Did you also rent an apartment in Florida? Did you maintain a Florida telephone number? Did you register to vote in Florida? Did you file a change of address with the Post Office?

You should review the situation with your, or your family’s, tax professional. If it is determined that you are indeed subject to Louisiana state income tax for 2004 do not just automatically accept the state’s assessment. Have the tax pro prepare an actual LA state return for 2004 to make sure the tax is calculated properly.

Does anyone out there have anything else to add?


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