The Social Security Administration has announced various new figures affecting both workers and retired people. All changes are scheduled to take effect Jan. 1, 1982.
The increase in the Social Security tax rate is not substantial: from 6.65 percent this year to 6.70 percent for 1982. But the maximum earnings on which tax is withheld rises from $29,700 to $32,400.
The increase won't really impose much of an extra bite on a worker whose income is less than the ceiling. For example, on $20,000 of wages in 1981, contributions will total $1,330.
In 1982 you will pay $1,340 on the same $20,000. (Of course if your salary goes up next year, your Social Security will increase also.) Employers match worker's contributions, so double the amount that appears on your Form W-2.
But Social Security contributions will increase substantially for the upper-income worker whose annual salary is consistently higher than the ceiling.
If your income from covered employment is greater than $32,400 in both years, the Social Security tax bite will jump from $1,975.05 to $2,170.80 in 1982--an increase of $195.75, just about 10 percent.
If you're self-employed, the situation is similar. The tax rate goes up only slightly--from 9.30 percent to 9.35 percent--but the ceiling for covered earnings climbs to the same $32,400 that applies to employes.
The earnings limits for people receiving Social Security benefits go up in January also. The present annual ceiling on earned income for beneficiaries between the ages of 65 and 72 is now $5,500; it increases to $6,000 for 1982.
There is no limit on earnings for those who are 72 or older. Beginning in 1983 this rule is scheduled to apply to beneficiaries who are 70 or older; but I wouldn't bet on it. This may well be one of the benefits that bite the dust when Congress takes a hard look at the faltering Social Security system next year.
If you're under 65, the amount you can earn without affecting your benefits will go up Jan. 1 from the 1981 cap of $4,080 to a new limit of $4,440.
In both cases--that is, for the beneficiaries under 65 and those between 65 and 72--the cost of exceeding the applicable ceiling is the loss of one dollar of Social Security benefit for each two dollars of excess earned income.
"Earned income" for this test does not include pension or retirement pay, withdrawals from an IRA or Keogh plan, insurance benefits or investment income like bank or bond interest or stock dividends.
Income from rental property is also excluded--unless you provide "substantial services" in managing the property, collecting the rents, etc. The definition of "substantial services" can vary in individual cases; the question is whether the money can be considered investment income or whether you are really engaged in the real estate business.
For part-time workers who are not yet receiving Social Security benefits, the amount of earnings required to be credited with a quarter of coverage will increase on Jan. 1 to $340 from the present $310 per quarter.
Here is good news for employes of charitable and educational organizations who are covered at work by a tax sheltered annuity.
In the column of Nov. 16 I said that a person participating in a TSA cannot have a separate IRA in addition. I was wrong.
The 1981 tax act includes TSAs--code section 403 (b) plans--in the list of employer-sponsored plans to which voluntary contributions must be offset against the annual $2,000 IRA ceiling.
The key is in the definition of "voluntary contributions." My friends at the IRS now tell me that an agreement with your employer for a specified amount to be withheld from your pay for deposit into a TSA is not a voluntary contribution in the sense intended by the act, but is more like a contractual commitment.
The principal consideration appears to be the exclusion of the withheld amount from your annual Form W-2. Under a normal TSA agreement, the amount withheld from your pay never appears on the W-2.
On the other hand, a true voluntary contribution would be the situation where your full salary appears on the W-2, and you then claim the deduction as an adjustment to income on your own tax return.
I apologize for any confusion the earlier incorrect statement may have caused. Starting in 1982, employes of charitable and educational institutions covered by a TSA will be eligible--if they meet the various other requirements--for a full IRA deduction as well.