Tuesday, January 11, 2011

3 Ways to Maximize Your Tax Savings

Now that 2011 is here, there is a good news for millions of workers in the United States--more money in their paychecks. Thanks to the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, there has been a 2 percent decrease in Social Security withholding taxes. The short-term tax break has been referred to as the payroll tax holiday. Both self-employed individuals and employed workers will see the bump in their regular pay effective January 1, 2011.

How Change Has Come

Employees were paying 6.2 percent of their pay toward Social Security. For 2011, employees will only have to pay 4.2 percent on income below $106,800. For self-employed individuals, the self-employment tax also drops from 12.4 percent to 10.4 percent. There will be no additional checks accompanying your normal paychecks. The adjustment will be made on your regular check, with the two percent difference added in throughout 2011.

Who Is Making the Changes?

Your employer will be responsible for making the Social Security withholding adjustment. The IRS has withholding tables concerning the changes which were released in December 2010 for employer assistance on making the withholding changes. In the event an employer is behind in making the updates, workers who do not see the tax adjustments within the month of January will receive an additional credit of the extra withholding in their regular paychecks before March 31, 2011. Because the tax-related measure was passed through Congress so late in 2010, the IRS has provided employers with extra time to complete the changes.

They have until January 31, 2011 to adjust the numbers. Anything not changed starting February 1, 2011 signals employers are in violation of the IRS requirements. The tax act for 2011 will only be a short-term tax break. Once 2012 hits, the payroll tax holiday will no longer be in effect unless the federal government once again steps in to extend the time period for another year. In 2012, the Social Security withholding amounts will go back to the current rate.

How to Check Up On Changes

Since employers are not legally required to update their payroll systems until the end of January, employees are advised to check their paystubs regularly to see if the change has been implemented. Keep track of any amounts that are withheld over the new percentage in the event your employer is required to provide you with a refund before the end of March.

Employees may also choose to complete a revised W-4 Form for 2011 and give it to the employer for their records. The IRS strongly recommends this action be taken to ensure you are paid what you are owed. Employers may not even make an announcement about the changes to Social Security withholdings so it will be up to you to inform fellow workers and keep a close eye on how you are being paid once the first paycheck of 2011 is received.

Three More Ways to Make the Most of Your Money

In addition the freebie you'll be getting from the Social Security tax break, there are also things that you could do to maximize your tax savings.

1. If your employer offers a 401k plan and you did not reach the maximum contribution limit for 401k, you might want to consider increasing your contributions to take advantage of this tax-deductible retirement savings.

2. Start planning for your IRA contribution now. The maximum contribution this year is $5,000 ($6,000 if you are 50 years or older), with some phase out limitations depending on the type of IRA, your income, and filing status. Since IRA contribution is not as automated as 401k, it is to plan now and spread your contributions over the course of the year, instead of trying to contribute the full amount at the end of the year.

3. If you are a self-employed individual, you might want to consider retirement plans designed for self-employed and business owners. For instance, a SEP IRA allows you to contribute as much as 25 percent of your income up to $49,000 per year--this contribution is tax-deductible similar to how a traditional IRA works.

Pinyo is the owner of Moolanomy Personal Finance Blog, which covers a wide range of personal finance and investing topics, with features that include reviews, comparison guides, and Q&A sections.

1 comment:

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