November Key Focus
What the 2012 IRA and Tax Changes Really Mean
Social Security and Supplementary Security Income (SSI)
beneficiaries are receiving a cost of living adjustment (COLA)
in 2012, the first time this has happened in several years. While
this may sound like a good thing, it’s actually a “mixed bag” for a
couple of reasons. First, Medicare premiums will also be on the
rise next year, but not as much as first feared.
The U.S. Department of Health and Human Services (HHS)
recently announced that the increase in Medicare Part B
premiums will not be as high as originially estimated. As a result,
most Social Security recipients will see a “real” increase in their
spendable dollars for 2012.
Some Americans will be on the losing side of the equation thanks
to the aforementioned increases. Just how do you think Social
Security pays for the COLA increases?
If you spend more, you’ve got to take in more (or so you’d think)
- and that’s exactly what will happen. Starting January 1, 2012
the amount of wages subject to the FICA and FUTA (the fancy
terms for Social Security and Medicare taxes) will increase from
$106,800 to $110,000. According to Social Security, this increase
will cause roughly 10 million U.S. workers to pay higher taxes.
As if that weren’t enough on its own, the current “payroll tax
holiday” is also set to expire at the end of 2011. This tax break,
created under the 2010 Tax Act passed last December, lowered the
employee portion of FICA (Social Security) taxes from 6.2% to
4.2% for 2011. There is some talk about extending the tax in one
form or another, but at this point, that’s all speculation. So barring
any changes between now and the New Year, without technically
increasing taxes, workers will go from paying 4.2% of their first
$106,800 in wages to FICA taxes in 2011 to paying 6.2% of their
first $110,100 wages to FICA taxes in 2012.
However, there is some good news. In 2012, the elective
deferral limit for plans like 401(k)s and 403(b)s will be increased
from $16,500 to $17,000. That means that workers will be able to
sock away an additional $500 per year on a tax deferred
basis. That could be used to help save money on taxes now or
help grow future tax-free retirement savings through a Roth IRA.
The catch-up contribution for 401(k) and other similar plans
remains at $5,500. Individuals age 50 or older by the end of 2012
can defer up to $22,500 of salary into their plan.
There are more limits that have been increased for inflation
for 2012. CLICK HERE to read the The Slott Report article.