A new year usually means changes to your paycheck. At the end of each year, the IRS and Social Security Administration issue new sets of tax guidelines and social security limits for the coming year.
Depending on how much you earn, these new limits can impact your regular paycheck. For instance, the Social Security Administration might take a bigger bite from your salary with each check. You also might have to pay the Medicare Tax according to the Affordable Care Act rules.
Because revised tax and social security limits go into effect at the start of each new year, this is a good time for employees to take a closer look at their household budgets. After all, a smaller paycheck might change the amount of money you can stash in your investment vehicles or sink into a college fund for your children.
Remember, these changes went into effect January 1, 2017. Make sure you understand that these numbers impact your 2017 paycheck, NOT your 2016 income tax return that you will have to file by April 15, 2017.
Again, the return you file by April 15, 2017, will use the rules from 2016, NOT the 2017 rules listed below. (Confusing, but important.)
Here is a look at some of the bigger changes coming to your paycheck this year:
Defined contribution plans: The maximum amount you can invest in a workplace 401(k), 403(b), 457(b) or federal Thrift Savings Plan remains at $18,000 in 2017. That means that you can invest a maximum of $18,000 this year in one of these plans. The annual limit for combined employee and employer contributions, however, has risen slightly from $53,000 in 2016 to $54,000 in 2017.
Individual Retirement Accounts: The maximum amount of money you can contribute to an IRA has not changed, either. You can still contribute a maximum of $5,500 this year or $6,500 if you are 50 or older.
Defined benefit plan limits: If you receive a defined benefit plan - commonly known as a pension - the limit on the maximum annual benefit that you can receive in 2017 has increased from $210,000 in 2016 to $215,000.
Social Security: Some things have changed. Others have not. The Social Security tax rate remains the same at 12.4 percent. This rate is evenly split between employers and employees, meaning that both pay 6.2 percent. In 2017, employees will pay Social Security taxes on up to $127,200 of their income, a fairly big jump from 2015's $118,500. What does this mean? If you make $127,200 or more in 2017, you will pay a total of $7,886.40 this year in Social Security taxes. Double the amount to $15,772.80 if you are self-employed and have to pay the entire tax.
Social Security benefits: Since there was a slight jump in inflation during 2016, the Social Security Administration will be making a minor 0.3% increase in payments for 2017. That will bring the maximum Social Security benefit up to $2,687 per month. That, of course, is not much. However, it is an improvement over last year, which saw no COLA increase.
Medicare tax: Medicare tax rates remain unchanged from 2016. Recall that higher earners pay a higher rate as mandated by the federal Affordable Care Act. Under the Act, employers must withhold 0.9 percent of all employees' wages over $200,000, or $250,000 for married couples filing jointly.
Standard deductions: The IRS left some adjustments from 2016 in regards to standard deductions. For single taxpayers, the standard deduction increased by $50 to $6,350 in 2017. The deduction for married taxpayers filing separately also increased to $6,350, and the standard deduction for married taxpayers filing jointly received a slight $100 boost to $12,700. The standard deduction for the head of household received the same $100 increase to $9,350 in 2017.
Flexible spending accounts: Employees can make a maximum contribution of $2,600 in 2017 to employer-sponsored health care flexible spending accounts. That number is an increase of $50 from 2016 limits.
Adoption credit: Taxpayers adopting a child with special needs can claim a $13,570 tax credit. For all other adoptions, taxpayers can take a credit of the actual amount of qualified adoption expenses, up to a limit of $13,570. This credit will gradually phase out for taxpayers with a modified adjusted gross income of $203,540 or more.
Changes such as these occur every year and are not unusual. The IRS is always tinkering with the tax code, which is why you need to take a new look at your annual budget each year. After all, if your paycheck changes, so should your budget.
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