Good news! If you are between the ages of 65 and 69 (retroactive to Jan. 1 of this year), a new social security law allows you to earn as much money as you wish without worrying about losing $1 of benefits for every $3 of compensation in excess of $17,000 of earnings. In other words, the legislation applies to individuals who have reached full social security retirement age (which is currently 65). For those below full retirement age, an earnings test still applies. However, for individuals attaining age 65 this year, the earnings limit is still $17,000 for the period before reaching age 65. Once they reach 65, no earnings test applies.
This is also great news for people who are planning their retirement. If you are younger than 65, it will make your planning much easier in terms of how much money you can make when determining how to finance your retirement. Problems have always existed in trying to shelter income for people attaining age 65. And it was difficult to maintain a job or be in business and meet the $17,000 earnings limit. Those problems have now been eliminated.
Other tax law changes include an increase in deductible 401(k) contributions. The contribution amount increases from $10,000 for 1999 to $10,500 for the year 2000.
Payroll tax increases for employees with an income of $76,200 and above: If you fall in this income range, you will be paying an additional $223 in (FICA) taxes this year. For the self-employed, self-employment tax is calculated at 12.4 percent for social security and 2.9 percent for medicare. The income limits are increased each year based on the average national wage. Last year's income limit was $72,600. The $3,600 increase this year at the 12.9 percent rate results in a $464 increase in tax. There is no limit to the 2.9 percent medicare tax.
Traditional IRS contributions are deductible but are subject to Adjusted Gross Income (AGI) limitations if you are an active participant in an employer maintained retirement plan. For the year 2000, the adjusted gross income limit for deducting the $2,000 maximum contribution is increasing to $62,000 for joint filers and to $42,000 for single filers. Roth IRA contributions are nondeductible but are also subject to Adjusted Gross Income (AGI) limitations.
Qualified distributions of a Roth IRA can be made after a five-year holding period and as long as one of the following applies: (1) Taxpayer's age is at least 59 1/2, (2) Distribution is due to death or disability or (3) Distribution is made to a qualified first-time home buyer.
Many of our clients have side business activities such as selling Avon products, operating a clothing store or owning a race horse. The following is an IRS summary of the tax effect on those businesses: An activity conducted as a "for profit business" is allowed to deduct expenses that are ordinary and necessary in carrying on the trade or business. If expenses exceed income, the loss is deductible against other income (such as wages, interest, dividends, etc.). Under IRC #162, if a loss is attributable to an activity "not engaged in for profit" the loss is not allowed as a deduction against other income.
An activity is considered a "for profit business" if gross income exceeds deductions for three or more out of five consecutive years. (Note: Two or more out of seven consecutive years for horse breeding, training, showing, or racing.) If a profit is not made in at least three out of five years, or if profits are small in the three profit years and losses are large in the two loss years, the activity must prove that it is a "for profit business" under the "facts and circumstances test" in order for it to be characterized as a trade or business qualifying for unlimited deductions.
An activity is engaged in for profit if the taxpayer entertained "an actual and honest, even though unreasonable or unrealistic, profit objective in engaging in the activity."
This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than 25 years. Contributions to this article were made by Shasta May, Director Business Development. If you would like further information, please contact Barry or Howard at 800-697-5153.