A new year usually means changes to your paycheck. That's 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. And you might have to pay a new Medicare Tax according to the new rules under the Affordable Care Act.
Because new 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 -- even if the total reduction is a small one -- might change the amount of money you're able to stash in your investment vehicles or sink into a college fund for your children.
It's important to note that these changes are actually in force for 2014. This means that these aren't the numbers you'll be using when filing your 2013 income tax returns this April.
Those returns use the numbers from 2013. You'll use these numbers when you fill out your tax returns in April of 2015. (That's 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 of money you can invest in a workplace 401(k), 403(b), 457(b) or federal Thrift Savings Plan has not changed for 2014. This means that you can still invest a maximum of $17,500 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 $52,000.
Individual Retirement Accounts: The maximum amount of money you can contribute to an IRA hasn't 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 2014 has jumped by $5,000 to $210,000.
Social Security: Some things have changed. Others haven't. 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, what is known as the Social Security wage base. In 2014, employees will pay Social Security taxes on up to $117,000 of their income. That is an increase from 2013. Last year, employees only paid Social Security taxes on up to $113,700 of their income. What does this mean? If you make $117,000 or more in 2014, you'll pay a total of $7,254 this year in Social Security taxes. Last year, you would have paid just $7,049.40 maximum.
Social Security benefits: Retirees did receive some good news from the Social Security Administration. Monthly Social Security benefits increased by 1.5 percent in 2014. This is a cost-of-living adjustment. Retirees shouldn't expect a big financial windfall from this increase, though. AARP reports that the average retiree will see monthly benefits increase by just $19.
Medicare tax: A big change to the paychecks of higher earners that started last year is the new Medicare tax 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.
Standard deductions: The IRS has changed the standard deductions that taxpayers can claim in 2014. For single taxpayers, the standard deduction has jumped to $6,200 in 2014 from $6,100 in 2013. The standard deduction for the head of household is $9,100, up from $8,950 in 2013. The standard deduction for married taxpayers filing jointly has risen to $12,400 from $12,200, while for married taxpayers filing separately it has risen to $6,200 from $6,100.
Flexible spending accounts: Employees can make a maximum contribution of $2,500 in 2014 to employer-sponsored healthcare flexible spending accounts. That amount has not changed from 2013.
Adoption credit: Taxpayers adopting a child with special needs can claim a $13,190 tax credit. For all other adoptions, taxpayers can claim a credit in the amount of qualified adoption expenses up to a limit of $13,190. This credit will gradually phase out for taxpayers with a modified adjusted gross income of $197,880 or more.
Does this seem like a lot of changes? According to a story in Forbes, the IRS made more than 40 updates to the tax code this year. That is significant. The surprising news, though? It's not unusual. The IRS is constantly 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.