Social Security Wage Base Jumps To $80,400 For 2001
The Social Security Administration has announced the 2001 increase in the maximum amount of earnings subject to social security and self-employment taxes. The wage base for the old age and survivors insurance (OASDI) portion will rise to $80,400 up from $76,200 in 2000.
The FICA rate remains the same in 2001 as it has been since 1990: 7.65% for employees and 15.30% for self-employed individuals. The 7.65% rate is the combined Social Security and Medicare rate. The Social Security or OASDI portion is 6.20% on wages up to the maximum taxable amount ($80,400 for 2001). The Medicare (HI only) portion, which remains at 1.45% (2.9% for self-employed workers), continues to carry no ceiling on maximum taxable earnings. As a result of the increase in the wage base, the maximum yearly Social Security tax paid by employees and their employers will increase by $260.40 each ($520.80 for self-employeds).
Nanny Tax Increase
The Social Security Administration also announced that the amount paid during 2001 by an employer for domestic services in the employer's home will not be considered FICA wages if less than $1,300 (up from $1,200 in 2000).
Retirement Earnings Test
Under the Senior Citizens' Freedom To Work Act of 2000 (April 7, 2000), the retirement earnings test exempt amount (the point at which retirees begin to lose benefits) was eliminated for individuals age 65 through 69 as of January 2000. The retirement earnings test exempt amount will rise from $17,000 a year to $25,000 a year for the year in which an individual attains age 65; the test applies only to earnings for months prior to reaching age 65. For retirees under age 65, the retirement earnings test exempt amount will rise from $10,080 a year to $10,680 a year.
IRS Updates Mileage Rates
The IRS updated the optional standard mileage rates for use in computing the deductible costs of automobile operation for business, charitable, medical, or moving expense purposes in the year 2001. Taxpayers may use the standard mileage rates in lieu of actual automobile operating costs. The IRS updates the standard rates annually, except for the charitable rate, which is provided in §170(i).
The standard mileage rates for the deductible costs of automobile use in 2001 are as follows: 34.5¢ per mile for business use of an automobile (up from the 2000 rate of 32.5¢ per business mile); 14¢ per mile for automobile use in providing services to a charitable organization (unchanged from 2000); 12¢ per mile for automobile use for medical reasons (up from the 2000 rate of 10¢ per mile); and 12¢ per mile for automobile use for moving (up from the 2000 rate of 10¢ per mile).
For owned automobiles placed in service for business purposes, and for which the business standard mileage rate has been used for any year, depreciation will be considered to have been allowed at the rate of 12¢ per mile for 1997, 1998, and 1999; 14¢ per mile for 2000; and 15¢ per mile for 2001, for the years in which the business standard mileage rate was used, the IRS stated.
IRS Changes Distribution Codes
The IRS announced changes to the distribution codes entered in box 7 on the 2001 Form 1099-R for distributions from IRAs. According to the announcement, Code N is added for reporting a "Recharacterized IRA contribution made for 2001," while Code R is changed to report a "Recharacterized IRA contribution made for 2000." The IRS explained that these changes are necessary in light of Notice 2000-30, 2000-25 I.R.B. 1266, which specifies a new method for reporting recharacterizations and reconversions occurring after 2000.
The IRS also noted that since only two distribution codes can be entered in box 7 on Form 1099-R, payers making IRA distributions are able to report a distribution as the result of an excess contribution to a Roth IRA only by using Code J with Code 8 or P, and they cannot use Code 1, 2, 3, or 4 if Codes J and 8 or P applies. To alleviate this reporting problem, the announcement provides that Code J is changed to report an "Early distribution from a Roth IRA, no known exception," and Code T is added to report a "Roth IRA distribution, exception applies." Further, the announcement states, Code 1 cannot be used with Code J and Code 2, 3, 4, and 7 cannot be used with Code T, but Code 5, 8, or P must be used, if applicable.
Rules Proposed for Sale or Exchange of Residence
The IRS proposes regulations under §121 relating to the exclusion of gain from the sale or exchange of a taxpayer's principal residence. The proposed regulations reflect changes to the law made by the Taxpayer Relief Act of 1997 (1997 TRA), as amended by the Internal Revenue Service Restructuring and Reform Act of 1998 (1998 RRA). The regulations address the definition of principal residence, providing that whether or not property is the taxpayer's residence, and whether or not property is used by the taxpayer as the taxpayer's principal residence (in the case of a taxpayer using more than one property as a residence), depends upon all the facts and circumstances. If a taxpayer alternates between two properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year will ordinarily be considered the taxpayer's principal residence. The rules provide that, in order for a taxpayer to satisfy the use requirement under §121(a), the taxpayer must occupy the residence (except for short temporary absences) for at least two years during the five-year period ending on the date of the sale or exchange.
IRS Proposes Regulations for New Comparability Plans
The IRS issues proposed regulations prescribing conditions new comparability plans and similar plans must satisfy to use the cross-testing method to determine compliance with nondiscrimination requirements. Under the proposed rules, defined contribution plans with broadly available allocation rates are permitted to use cross-testing in the same manner as under current law, while other defined contribution plans are permitted to cross-test only if they pass a gateway that prescribes minimum allocation rates for nonhighly compensated employees (NHCEs).
IRS Finalizes Rules on Capitalization of Farming Production Costs
The IRS issues final regulations relating to the application of §263A to property produced in the trade or business of farming. The final regulations provide that the exceptions to §263A provided in §263A(d) apply only to property produced by a taxpayer in a farming business, defined as the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity, and that taxpayers that contract harvest horticultural commodities are not subject to capitalization under §263A. The regulations also clarify that a taxpayer is engaged in the production of property in a farming business, rather than the mere resale of plants or animals, if the plant or animal is held for further cultivation and development before sale.
On April 7, 2000, President Clinton signed into law P.L. 106-182, the Senior Citizens' Freedom To Work Act of 2000. This legislation abolishes the earnings limitation for Social Security recipients who are at or above normal retirement age (presently, age 65) but not yet age 70 by eliminating the Social Security retirement earnings test in and after the month in which a person attains age 65. Elimination of the retirement test would be effective with respect to taxable years ending after December 31, 1999.
