A new year usually means changes to your paycheck. That is because each year, a new set of tax and social security limits imposed by the IRS and Social Security Administration go into effect.
Depending upon how much you earn, these new limits can shrink 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.
It is important to note that these changes are in force for 2015. This means that these are not the numbers you'll be using when filing your 2014 income tax returns this April.
Returns filed by April 2015 will apply the rules from 2013. You'll use these numbers when you fill out your tax returns in April of 2015. (That is 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 increased from $17,500 in 2014 to $18,000 in 2015. This means that you can invest a maximum of $18,000 this year in one of these plans. The annual limit, though, for combined employee and employer contributions has increased, by $1,000, to a maximum of $53,000.
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 are fortunate enough to receive a defined benefit plan -- commonly known as a pension -- the limit on the maximum annual benefit that you can receive in 2015 has increased by $5,000 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. What has changed is how much of your pay is subject to Social Security taxes, or, the Social Security wage base. In 2015, employees will pay Social Security taxes on up to $118,500 of their income. That is an increase from 2014 of $1,500. Last year, employees only paid Social Security taxes on up to $117,000 of their income. What does this mean? If you make $118,500 or more in 2015, you'll pay a total of $7,347 this year in Social Security taxes. Last year, you would have paid just $7,254 maximum.
Social Security benefits: Retirees did receive some good news from the Social Security Administration. Monthly Social Security benefits increased by 1.7 percent in 2015. This is a cost-of-living adjustment. Retirees should not expect a financial windfall from this increase, however. The average retiree will see monthly benefits increase by just $22.
Medicare tax:Medicare tax rates remain unchanged from 2014. 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. This means that if you earn $200,001 or more, you'll see your paycheck fall slightly because of this new tax. The standard Medicare tax rate remains at 1.45% on earnings to $200,000. The 0.9 percent is added to the standard rate for high earners.
Standard deductions: The IRS changed the standard deductions that taxpayers can claim in 2015. For single taxpayers, the standard deduction has jumped to $6,300 in 2015 from $6,200 in 2014. The standard deduction for the head of household is $9,250, up from $9,100 in 2014. The standard deduction for married taxpayers filing jointly has risen to $12,600 from $12,400, while for married taxpayers filing separately it rose to $6,300 from $6,200.
Flexible spending accounts: Employees can make a maximum contribution of $2,550 in 2015 to employer-sponsored health care flexible spending accounts. That is a $50 increase from 2014 limits.
Adoption credit: Taxpayers adopting a child with special needs can claim a $13,400 tax credit. For all other adoptions, taxpayers can take a credit of the amount of qualified adoption expenses up to a limit of $13,400. This credit will gradually phase out for taxpayers with a modified adjusted gross income of $201,010 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.