TAXES CHANGE WHEN A SPOUSE PASSES AWAY

 

When a spouse passes away there are many things of a financial nature that the surviving partner needs to address.  One important thing that the survivor needs to do is review and revise their income tax withholding.

The death of a spouse is one of the life-changing events when you need to contact your tax professional

The tax and withholding tables for a Single filer are different than those for married taxpayers filing a joint return.  And, most important, the Standard Deduction, which most taxpayers now claim, for a Single filer is half the amount allowed for a joint filer. 

While income may go down the first year a surviving spouse files as a Single taxpayer, if he or she claims the Standard Deduction, and also claimed it when filing jointly, using 2021 as an example, deductions will be reduced by at least $12,550.  

One possible mitigation to the reduced deductions does exist.  For most of my clients reaching the $10,000 SALT limit was not a problem whether filing as Single or married.  So, if mortgage interest and excessive medical expenses or contributions are a factor, the now Single filer may be able to itemize.

You need to do, or have your tax professional do, a projection of income and deductions for the first year as a Single filer and compare the resulting tax liability to current withholding.  You will probably need to file new Form W-4s (or, if applicable, W-4Vs) with your employer, pension provider or the Social Security Administration.  Or you may need to begin making quarterly estimated tax payments.

This applies to both your federal and state withholding.

TTFN

TAXES 101 - WITHHOLDING

Just so you know.

The withholding of federal and state income tax from any source of income is an estimation of anticipated tax liability.  It is not in any way, shape or form a payment in full of the actual total amount of tax due on the applicable source. 

So, having an amount withheld does NOT mean you have paid the tax liability in full on that source of income. 

All taxable income is reported and added up on the Form 1040 (or 1040-SR) and all tax withheld, plus any estimated tax payments made, are added and applied to actual tax liability on the form.  The result will be a balance due or refund.  It is truly extremely rare, based on my 50 tax filing seasons, for a tax return with a tax liability to have either no balance due or no refund – although it has happened once or twice.

To repeat, having tax withheld from a source of income does not mean you have paid all the tax due on that source of income.

I realize this is pretty basic.  But a fellow tax pro in the course of reviewing a tax manuscript I have written told me that he has had several occasions over the years where clients have wrongly believed that they have paid the total tax due via withholding and no additional tax needed to be paid.

TTFN

THE 2020 FORM W-4

The IRS has released the final version of the 2020 Form W-4 – Employee’s Withholding Certificate, to, hopefully, properly reflect the changes enacted by the GOP Tax Act (i.e. the Tax Cuts and Jobs Act).

The major change to this form is that the concept of “withholding exemptions” no longer exists.  And, of course, it is now a full page instead of just coupon-sized.

Every single employed taxpayer will need to file a 2020 Form W-4 with their employer.

The form at one point is concerned that “more tax than necessary may be withheld”.  While for the financially prudent taxpayer owing Sam $1,000 or less at tax time is actually beneficial – excess withholding is an interest-free loan to the government, and owing a small amount means that you had full use of your money during the year – most taxpayers are more concerned with having less tax than necessary withheld, and would prefer a cushion to avoid a balance due on their 1040.  For peace of mind if nothing else being over-withheld is better than being under-withheld.  And many taxpayers have historically used a substantial tax refund as a form of “forced savings”. 

In Step 1 you enter your name, address, Social Security number, and filing status.  There is no long the option to claim “Married, but withhold at higher Single rate”.  And the new W-4 includes the Head of Household status option, which was not on the old W-4.  

As a point of information - claim “Head of Household” status on your W-4 only if you file your Form 1040 each year as a Head of Household.  I learned very early in my career that while some people may consider themselves a “head of household”, the IRS does not.  For IRS purposes a “household” does not consist of one person.  There are very strict and specific rules for this filing status.  Perhaps the best explanation of what the IRS considers a true “Head of Household” is a single parent with a dependent child.

Step 2 of the new W-2 finally recognizes the possibility that the job for which the W-4 is being submitted may not be the taxpayer’s only source of income, especially if he or she is married.  If you have more than one job, or you are married and your spouse also has a job, check the box at item (c) in Step 2.

The complexity of the new W-4 lies in the “Multiple Jobs Worksheet” on Page 3 of the W-4 packet.  Do not use this worksheet – it will very likely have your head spinning.

If you are using withholding as savings, do not make any entries in Step 3 for any dependents you are claiming.  If this is not an issue, as a safety matter claim only half the number of actual dependents – if you have two children under age 17 claim only $2,000 here for one dependent; if you have two children age 17 or older claim only $500.  For a married couple only the spouse with the higher W-2 income should claim any amount for dependents.  If you are married and both spouses work and one or both of the spouses has a second job neither of you should claim anything for dependents in Step 3.

Most definitely include any taxable non-W-2 income on line 4(a) in Step 4.  This includes interest and dividends, capital gains, K-1 pass-through income, net self-employment income from Schedule C or C-EZ (after any adjustments to income for health insurance and pension contributions and the Section 199a QBI deduction) and any amounts that would be included on Line 8 of Form 1040 Schedule 1.  You can use your 2019, or in January the 2018, tax return as a guide for completing this Section.  If you are receiving IRA. Pension or Social Security income you do not have to include this income here.  You can request a specific percentage be withheld for federal income tax for these sources – and you should have federal income tax withheld from each source. 

It is my recommendation that you do not include anything for “Deductions” on line 4(b) of Section 4 – even if you will be able to itemize or are entitled to any additional deductions.  Here is another opportunity to provide a cushion.

As for entering any “Extra withholding” on line 4(c) – on the initial 2020 W-4 filing you can leave this blank.  If after a month of withholding under the new W-2 you think you may need more withheld you can submit another W-4 with the same entries you made on the original but adding an additional amount on 4(c).  After preparing your 2019 return you may want to submit a revised W-4.

It is important that you keep a copy of every 2020 Form W-4 you give to an employer for your records.

Looking at the form there is no place on the form for an employee to indicate “EXEMPT”, as there was on the old W-4.  Dependent children with summer and after-school jobs do not need to have any income tax withheld.  However, the instructions tell you to write "'EXEMPT' on Form W-4 in the space below Step 4(c)".  Do not enter anything in Steps 2 and 3 or elsewhere in Step 4. 

While the 2020 Form W-4 is more involved, I believe it is actually “more better” than the old method of calculating withholding, especially under the GOP Tax Act.

TTFN

JUST A REMINDER

I OWE HOW MUCH !?!

The federal income tax withholding tables have been revised to reflect the new lower rates enacted by the GOP Tax Act.

I do believe that the new rates are a bit too “liberal” and may reduce withholding too much in order to provide a bigger paycheck and give the appearance of a bigger tax cut.

And, with the elimination of the personal exemption deduction, previous withholding allowances that may have been appropriate under the old law may no longer apply to the new law.

If you do nothing you may be surprised at tax time with either a smaller refund or actual tax due.

It is important to check your withholding now to make sure you are not surprised next year.

You can use the new “IRS Withholding Calculator” to do a “paycheck check-up”.

TTFN

A LITTLE THIS-A, A LITTLE THAT-A

+ I owe an apology to McDonald’s, Burger King, Wendy’s, Taco Bell, etc. for using them in a description of Henry and Richard and other commercial tax return mills of that ilk.

I have always said that H+R et al “charge gourmet restaurant prices for fast food service”.  Basically, I am observing that Henry and Richard, and the others, ain’t cheap, or even reasonable, and the fees are certainly not commensurate with the service.  But comparing the service at tax preparation chains to that received at fast food chains is not fair – nor true.

Prior to being diagnosed with diabetes I was a frequent patron of McDonald’s, Burger King and Wendy’s.  For the most part, I found the service provided by these chains to be most definitely “appropriate”.  And, again for the most part, I most certainly received value for my money. 

Those who use tax preparation chains will NOT be able to say the same thing when describing their experience.

And I must point out that nobody at McDonalds, Burger King or Wendy’s tried to force me to buy fries or onion rings that I neither wanted nor needed.

So, more appropriately, H&R et al “charge gourmet restaurant prices for service that is inferior to the service you get at a fast food chain.”

Of course, to be fair, I must always include in my assessment of tax preparation chains the following statement –

It may actually be possible that the best tax preparer, at the best price, for your particular situation is an H+R Block, or other chain, employee.  But this is only because of the individual education, experience, ability, temperament, and other factors that are specific to that individual preparer or perhaps that unique and specific franchisee.

Hey, it is better to be safe than sorry.  Bottom line - don’t use Henry and Richard or another chain to have your 2017 income tax returns prepared.  If you are looking to find a tax pro you can start here.

+ Hey fellow tax pros – did you see Monday’s post at THE TAX PROFESSIONAL?

+ This past Sunday was the first payroll I processed for a business client using the new tax withholding tables that were revised to reflect the changes of the GOP Tax Act.  I was curious to see if employees were actually getting any more money in their paychecks.

The gross payroll – total wages paid - for 20 employees for the 2-week pay period was up about $3,600 from the January 8^th payroll, but the federal income tax withholding was $1,050 less.  So, there actually was more money in the paychecks.

However, the pay checks of the two highest paid employees, including the millionaire owner of the business, with the same gross income for the two payroll periods being compared, were increased by over $750 due to reduced federal income tax withholding.  Obviously, the increases in the paychecks of the lower paid employees were small.

I do worry, being cynical, that the withholding tables are a bit too “generous” to try to prove that serial liar Donald T Rump was telling the truth for once when he said workers would see increased paychecks thanks to the Act.  I expect that, while individual paychecks will be slightly higher, 2018 tax return refunds may be lower, or balances due higher, especially for employees who live in New Jersey, as the employees of the above client do.

I am not alone in my concerns.  In “Democrats raise concerns about IRS withholding tables” at TAXPRO TODAY Michael Cohn tells us (highlights are mine) -

“The ranking Democrats on the tax-writing House Ways and Means Committee and Senate Finance Committee are worried the Internal Revenue Service might succumb to political pressure by releasing withholding tables this year that cause employers to withhold too little in federal taxes from their employees’ paychecks to make it appear the tax cuts are larger than they really are, with the result that taxpayers will end up owing more money on their taxes next year.”

+ Speaking of business clients and the GOP Tax Act, also this past week-end a business client, a family owned “regular” (non-S) corporation with 2 shareholders that usually has net taxable income of under $50,000, asked if its tax will be reduced under the new tax law.

When the lower corporate tax rate was originally discussed I had thought the entire rate scale would be reduced. I think I had read somewhere that those currently paying 15%, based on net taxable income, would pay 8% under “tax reform”. However, everything I have read says the income tax rate in the Act is a flat 21% tax rate on net taxable income for all “regular” (non-S) corporations.

So smaller closely held corporations, with net taxable income of $50,000 or less, who previously paid 15% in federal income tax will actually see a 6% tax increase, and, because the sliding scale of tax rates is gone, those with $75,000 or less in taxable income will see a 2+% increase.

Once again true small business gets screwed!

+ FYI - some guidance from the IRS on one of the changes in the GOP Tax Act.

The weekday daily “Checkpoint Newsstand” email newsletter tells us what it learned from the “Frequently Asked Questions” (FAQs) posted to the IRS website -

“The FAQs clarify that a Roth IRA conversion made in 2017 may be recharacterized as a contribution to a traditional IRA if the recharacterization is made by Oct. 15, 2018. A Roth IRA conversion made on or after Jan. 1, 2018, cannot be recharacterized.”

+ The last word - As with any post, your appropriate comments, and not “praise” that is really only trying to promote your site or product, are always welcomed.  I also want to know if you find any tax law inaccuracies, or typos or other clerical FUs, in the post.

TTFN

AN INTERESTING TAX WITHHOLDING STRATEGY

I learned an interesting tax withholding strategy from a client who resides in a “life care” assisted living facility a couple of years ago.

 

First of all – what do I mean by a “life care” facility?  SENIOR HOMES.COM explains “What are Life Care Communities?” -

 

“Life care is one type of Continuing Care Retirement Community (CCRC) that provides independent living, assisted living and nursing home care.”

 

And - 

 

“Life care communities are different from other senior housing options in that they require a long-term, upfront financial commitment that, in turn, guarantees housing, services and nursing care all in one location through the end of life.

 

In contrast to fee-for-service contracts, life care residents pay a large initial deposit plus a monthly maintenance fee that stays nearly the same no matter how much care is needed.”

 

My client, a retired couple, paid a very, very substantial “up-front fee” (in the hundreds of thousands of dollars).  And each month their net Social Security and pension checks are paid directly to the facility as monthly “maintenance” fees.  A resident or a resident’s estate may receive a partial refund of the “up-front” fee is he or she leaves the facility or passes.

 

Residents of my clients’ facility receive a private room with bath, 3 meals served in the dining room, housekeeping, laundry, and all medical care paid for by the facility.  There are also planned trips and in house activities, 2 beauty parlors, an on premise bank, billiards, ballroom/theater, arts and crafts, exercise equipment and classes, library and chapel.  All this is included in the upfront and monthly fees.

 

So basically the couple has no living expenses, as just about everything, including all medical care and prescriptions, are provided by the facility without additional charge.

 

If the health of my clients deteriorates and nursing care is required it is provided within the same facility.

 

As I explain in my MEDICAL EXPENSE GUIDE you can deduct as a medical expense on Schedule A -

 

“The ‘lump-sum’ entrance fee paid to a ‘life-care’ or ‘continuing-care’ facility that is specified in the residential agreement as a condition for the facility’s promise to provide lifetime care that includes medical care.  The qualifying amount may be deducted in full in the year it is paid, even though the medical care will be provided in the future.”

 

The husband, a retired municipal employee, receives a monthly pension from the State.  He has elected to have both federal and state income tax withheld from his monthly pension check.

 

A few years ago I told my client that, due to a pension exclusion and high filing threshold the state tax return, as long as his situation does not change, or he does not win the Publishers’ Clearing House sweepstakes, he will no longer need to file a state income tax return each year – and that he was only filing a state return to get a full refund of all the state income tax withheld.  I suggested that he stop having state income tax withheld from his pension.  I also told him that he could reduce the amount of federal income tax withheld.

 

My client told me that he wanted to get the federal and state refunds each year.  Since the facility got the total amount of his monthly pension and Social Security checks, and he no longer had a monthly income, he used the refunds from the excess withholding to get some in pocket “spending money”.  Unlike the monthly benefit checks, the refund checks went to him and his wife and he could cash these checks and pocket the money.

 

So – it is something to think about if you, or a relative, are in a similar situation.

 

TTFN

EVALUATING YOUR WITHHOLDING

Now that your have filed your tax return, and paid your tax or received your refund, it is time to learn from your 2015 tax return.

 

The first thing you should do is evaluate your income tax withholding.

Let’s face it – everyone loves, and wants, a tax refund!

And as a tax preparer, very few things give me more pleasure, at least during the tax filing season, then telling a client, “Your Uncle Sam owes you tons of money this year!”  It is certainly better than starting off with “Oi vey!” or “Now don’t shoot the messenger”.

And if everyone loves a refund it follows that everyone hates paying their “uncles”.

However, from a strictly financial point of view, when it comes to taxes it is truly “better to give than to receive”. A tax refund means that you have made an interest-free loan to the federal, or state, government.

If you owe Sam, or your state, a balance due on your return that, by way of the various “safe harbor” rules, avoids a penalty assessment for “underpayment of estimated tax”, it is you who have received an interest-free loan from the government. You have had full use of your money during the year!

Quite a few of my clients receive rather substantial refunds on purpose, and have been doing so for years. It is a form or “forced savings”, like a vacation club. They plan to use the refund to pay for their annual family vacation, or to make needed home improvements, or pay for college, or pay off credit card debt.  I, and they, know full well that if they had an extra $100-$200 in their pockets each week they would spend it – and not necessarily wisely.

My suggestion is not to get the additional money in your take-home pay.  If you belong to a credit union at work have the additional amount of your pay directly deposited to your account. Credit unions often pay more than banks. Or you can increase your employee contribution to a pension or thrift savings plan. This way the extra $100 never finds its way into your hands.

Or you can have the additional money directly deposited to a ROTH, if you qualify, or traditional IRA account.  You can set up a ROTH myRA account and fund it with automatic payroll deductions.  To set up a myRA account go to www.myRA.gov.

If you have accumulated excessive high-interest credit card debt using the extra $100-$200 per week to pay down this debt is, in many cases, like getting a double-digit return on your money.  But, just like with using home equity borrowing to pay down credit card debt, you must be sure that you do not turn around and build the credit card balances back up again.

If you received large federal and state refunds this tax filing season you should immediately change your withholding at work by filing a new Form W-4.  You may also be able to file a separate state W-4 form if you are only changing your state withholding. 

A federal withholding allowance represents your total tax deductions divided by the personal exemption amount ($4,050 for 2016).

Of course the reverse also applies.  If you owed too much to any of your “Uncles”, and were hit with a penalty for “underpayment of estimated tax”, you should increase your withholding.   

On the federal level you could be subject to a penalty for underpayment if you owe at least $1,000; it is often less on the state level (for New Jersey it is $400).  In order to avoid the penalty for underpayment of estimated tax for 2016 you must have either 90% of your final 2016 tax liability or 100% of your 2015 tax liability (110% if your 2015 AGI was over $150,000) paid in during the year by withholding and/or quarterly estimated tax payments.

The timing of the payment of tax is important in avoiding the penalty, which is calculated based on quarterly payments.  Increasing the tax withheld is better than making quarterly estimated payments.  Withholding is assumed to be made evenly throughout the year.  Estimated taxes are applied in the calculation when actually paid.  Even if you have all your federal income tax withheld in December it is treated as being paid in equally over the 4 quarters for purposes of calculating underpayment of estimated tax.  If you had $10,000 withheld in December it is assumed that $2,500 was paid in for each of the 4 quarters.  A $10,000 estimated tax payment made in December is treated as being paid in December, and you could be penalized for underpayment for the first 3 quarters

You can go to www.paycheckcity.com and use the free Salary Paycheck Calculator or Hourly Paycheck Calculator to review various withholding scenarios.

If you elect to make quarterly estimated tax payments you can use the federal EFTPS system to pre-schedule your payments to automatically come out of your bank account so you do not forget to make them on time. 

 

TTFN

 

 

ADVICE FOR A NEW GRADUATE STARTING OUT IN HIS/HER FIRST FULL-TIME JOB

Dear Graduate:

1.  Claim Single-1, or Single-0, on your Form W-4 for federal and state withholding.  Do NOT claim more than 1 exemption.

2.  Participate in your employer’s 401(k) or 403(b) plan.  If cash-flow permits, contribute the maximum, which for 2014 is $17,500.  If you cannot contribute the maximum try to contribute at least enough to qualify for the maximum amount of any employer matching contribution.  If your employer offers a ROTH 401(k) or 403(b) option choose this option.  As an alternative, if you are contributing the maximum put 50% in a “traditional” account and 50% in a ROTH account.

3.  If you contribute toward the cost of employer-paid group health insurance premiums via payroll deduction, and you are offered an option, elect to have your contributions be treated as “pre-tax”.

4.  Participate in your employer’s medical expense Flexible Spending Account (FSA).  Be conservative and start with $1,000.  You can increase your contribution in subsequent years once you get a handle on your annual out-of-pocket medical expenses.

5.   If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.  The maximum you can contribute to an IRA, “traditional” and ROTH combined, for 2014 is $5,500.

6.  Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Each week put $10, $20, or $50 in this “bank” (if you choose $20, but $20 in each week).  On January 2nd of 2015 take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for tax year 2015.  Continue this practice for 2015 and subsequent years.  

TTFN

LEARNING FROM YOUR 2012 FORM 1040

Did you owe too much, or get too large of a refund, this year?  You should review and perhaps change your withholding at work.

Uncle Sam wants you to pay in at least 90% of your current tax liability, or 100% of your prior year’s liability (110% if that year’s AGI was over $150,000), paid in during the year via either withholding or quarterly estimated tax payments.

If your 2012 tax return had a balance due of more than 10% of your total tax liability, and this was not the result of a special non-recurring item, you should have more tax paid in during the year. 

In my opinion, increasing withholding is better than making quarterly estimated tax payments.  It is certainly much easier – and less painful.  You do not have to worry about forgetting to make the payment, or not having enough cash on hand to cover the payment when it becomes due. 

The penalty for underpayment of estimated tax is calculated on a quarterly basis.  In making the calculation income tax withholding is considered to be paid in evenly throughout the year.  So additional withholding later in the year will be applied evenly to the entire year.  Because of this, increasing your withholding can be “more better” than starting to make estimated tax payments later in the year.

If you elect to make quarterly estimated tax payments you can use the federal EFTPS system to pre-schedule your payments to automatically come out of your bank account so you do not forget to make them on time.

In the past when a client got too big a refund I would scold him/her and say that he/she was making an interest free loan to the government.

While this is still true, I do not scold any more, considering the pitiful amount of interest being paid on savings account today. 

Many taxpayers use excess withholding as a kind of “forced savings”, and count on a large refund to, for example, fund their vacation.  They know full well that if they had an extra $100 or more in their pocket each week they would spend it.  I do actually support this concept. 

However, if you have large credit card debt you should use the $100 or more of overwithholding each week to pay down this debt.  Because of the usurious interest rates charged by many cards, doing so will provided a substantial “return on investment”.  Similarly, you can use some of the overwithholding to make extra principal payments on your mortgage and cut years off the term.

Many states allow taxpayers to file separate state W-4 forms to have different withholding than for the federal tax.  If you owed Sam this year, but got a state tax refund you should think about increasing your federal withholding and reducing your state withholding so it is “revenue neutral” but applies withholding more appropriately.   

TTFN

DAMNED IF THEY DO AND DAMNED IF THEY DON'T

It is December already and there is no progress in Washington on “taxmegeddon”.

If (or more likely when) BO and the idiots in Congress fail to act on the “fiscal cliff” issues before the end of 2012, what is the IRS going to do regarding withholding tables for 2013?

If the Service follows “current” law, federal income tax withholding will substantially increase for many, if not most, employees, as the so-called “Bush tax cuts” will have expired on December 31, 2012, and everything will go back to pre-Bush rules.  If the idiots in Washington eventually pass retroactive extensions of the expiring breaks, the IRS will need to revise the withholding tables, as will software companies, and withholding will be totally FU-ed for an extended period of time, resulting in lower pay checks for almost all employees for a couple of months.

If the Service assumes the idiots in Washington will eventually pass retroactive extensions and does not change the federal withholding tables, keeping everything the same as 2012 or with some inflation adjustments, and the idiots in Washington do nothing, the IRS will need to revise the withholding tables, as will software companies, and withholding will be totally FU-ed for an extended period of time, resulting in many employees being under-withheld for the year and owing tax when filing their 2013 returns.

Unfortunately it is we taxpayers, not the IRS or the idiots in Washington, who may be damned if they do and damned if they don’t.

We must hope that whatever assumption the IRS uses to determine federal income tax withholding effective January 1, 2013 turns out to be correct. 

TTFN 

“SUMMER” RERUN - DEPENDENTS AND INCOME TAX WITHHOLDING

{The post has been updated to include the 2012 standard deduction numbers – rdf}

Often times the cost of preparing a short form for a dependent child with an after-school or summer job, solely for the purpose of getting a refund of the in-come tax withheld, is more than the amount of the refund.

Before starting a job, a student is given a Form W-4 to fill out. Line 7 of the W-4 allows an employee to claim exemption from federal and state income tax withholding, if he/she had no income tax liability for 2011 and does not anticipate earning enough to pay income tax for 2012, by writing the word “EXEMPT” in the box indicated.

Writing “EXEMPT” on the form means that the employer will withhold only FICA (Social Security and Medicare) and any required state unemployment and/or disability taxes from the student’s wages.

For 2012, the federal standard deduction for a dependent with a W-2 is the greater of $950 or the sum of $300 and the dependent's earned income, not to exceed $5,950 (plus $1,450 if age 65 or blind). The state amount varies, and may be more of less than $5,950.

If a dependent student with a summer job does not expect to earn more than $5,950 during 2012, including up to $300.00 in interest, dividends and capital gains, the child should claim “EXEMPT” on his/her Form W-4. This way he/she will not have to file a federal income tax return simply to get a refund of the income tax withheld.

TTFN

A RAISE IN PAY!

Did you notice an increase in your first paycheck of the year?

No – your boss did not decide to give you a raise. Congress did! The Tax Hike Prevention Act passed in mid-December gave all workers, both employed and self-employed, a 2% raise.

The Act reduced, for 2011 only, the employee share of the Social Security component of the FICA tax by 2%, from 6.2% to 4.2%.

If you earn $1,000 a week your Social Security withholding had been $62.00. For 2011 it will be $42.00.

Social Security withholding stops when your wages for the year reach $106,800. So the maximum you can save is $2,136.00. The maximum amount of employee Social Security withholding for 2011 is $4,485.60.

If you have more than one employer in 2011 and the total amount withheld for Social Security by all employers exceeds $4,485.60 you can get a refund of the excess withholding when you file your 2011 Form 1040.

The employer share of Social Security remains unchanged. Your boss will continue to pay 6.2% of your earnings, up t $106,800, into Social Security.

Self-employed individuals pay into Social Security via the “self-employment tax”. They also get the 2% savings. The Social Security component of the self-employment tax for 2011 drops from 12.4% to 10.4%.

If you did not notice the 2% increase in your first paycheck it may be because your employer’s payroll software has not yet been adjusted to reflect the change. The reduction is required to be in place by January 31, 2011. You must get a “catch-up” adjustment for any over-withholding no later than March 31st.

This 2% reduction in payroll taxes replaces BO’s “Making Work Pay” credit, which replaced Dubya’s disastrous rebate checks. While the MWP credit maxed out at $400.00 ($800.00 for a married couple), as I mentioned above this method can put a maximum of $2,136 ($4,272 for couples) in your pocket! However those who earn $10,000 per year will only get $200, where under Making Work Pay they got $400.

This tax cut is projected to cost $120 Billion.

TTFN

LEARNING FROM YOUR 1040 - PART ONE

The tax season is over - to which I once again exclaim a hearty Thank God! You have sent in your return with check, or are eagerly awaiting your refund.

Now is the time to look back and learn from this year’s 1040 filing so that you can make next year’s process less taxing.

Did you get too big a refund? You should revise your withholding at work so that less is withheld.

While everyone loves, and hopes for, a big refund, from a strictly financial standpoint when it comes to your tax return it really is better to give than to receive.

Getting a refund, especially a large one, means that you made an interest-free loan to the government. If you want to loan money to Uncle Sam buy Savings Bonds or Treasury Bills.

Interest rates on deposit accounts these days are truly pitiful, and I certainly sympathize with clients who use tax withholding as a kind of “forced savings” or “vacation club”. I also know that if many of my clients got an extra $100 in their paycheck each week it would be gone before the next one arrived. But there are alternatives.

If you belong to credit union at work have the additional amount of your pay directly deposited to your account. Credit unions often pay more than banks. Or you can increase your employee contribution to a pension or thrift savings plan. This way the extra $100 never finds its way into your hands.

You can have the additional money directly deposited to a ROTH, if you qualify, or traditional IRA account.

Another good idea is to use the increased in take home pay to pay down a credit card balance. With finance charge rates as high as 20+% this is truly a good return on your investment.

Did you have a large balance due on your 2009 Form 1040 (or 1040A)? You should revise your withholding at work so that more is withheld.

While it is ok to owe your “uncles”, as long as you have the money set aside, there comes a point when you may be penalized for owing too much. The IRS and the states could charge you a penalty for “underpayment of estimated tax”.

On the federal level you could be subject to a penalty for underpayment if you owe at least $1,000.00. To avoid the penalty you must have either 90% of the current year total tax liability (Line 60 on the 2009 Form 1040), or 100% of the prior year’s total tax, paid in during the year either via withholding or quarterly estimated tax payments. If your 2008 AGI was over $150,000 - $75,000 if filing separately – you must have 110% of the 2008 total tax paid in for 2009 to be covered under the “safe harbor”. The state may have different safe harbor rules.

The penalty for underpayment of estimated tax is calculated on a quarterly basis. Withholding is considered to be made evenly throughout the year – even if more is withheld at the end of the year. If your total federal income tax withholding for the year is $10,000 it is assumed by the IRS that $2,500 was withheld each quarter, even if $5,000 was actually withheld from January through September and $5,000 from October through December.

So, if the total tax liability on your 2009 Form 1040 was $10,000, the safe thing to do is make sure that for 2010 you have $10,000 in federal income tax withheld from your various sources of income.

To change your withholding you must fill out a new Form W-4 and give it to your employer. To have less withheld you increase the number of withholding exemptions (i.e. go from Married-1 to Married-3). To have more withheld you would decrease the number. If you are married you can have more withheld by claiming “Married but withheld at higher Single rate”.

You can try to avoid or reduce the penalty for underpayment, if charged, you can “annualize” your income to show that a larger portion was received late in the year. If you sold an investment or property for a huge gain in October your penalty would be calculated on one calendar quarter.

If you choose to pay quarterly estimated taxes you can download the 2010 Form 1040-ES at the IRS website.

The IRS website also has a W-4 Calculator. And you can go to www.paycheckcity.com and use the free Salary Paycheck Calculator or Hourly Paycheck Calculator to review various withholding scenarios.

If you got a refund from Sam but owed your state you may be able to file a separate state Form W-4 to change only the state withholding.

More lessons to follow.

TTFN