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11 Most Overlooked Tax Deductions

Updated for 2011

Qualified Plans

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Limit on Elective Deferrals

Employees:

There is a limit on the amount an employee can contribute out of his/her pay to a qualified plan each year.

In addition, the employee cannot defer more than the limit that applies to a particular year.

Tax year 2011 contribution limit for employees:

For tax year 2011, the basic limit on elective deferrals is $16,500 ($17,000 for 2012).

If, in conjunction with other plans, the deferral limit is exceeded, the difference is included in the employee's gross income.

Catch-Up Contributions for a 401(k) Plan

A 401(k) plan can permit participants, age 50 or over at the end of the calendar year, to also make catch-up contributions. These are contributions in addition to elective deferrals.

The catch-up contribution limit for a 401(k) plan for 2011 is $5,500. The limit is subject to cost-of-living increases.

Employee Compensation Limit

For tax year 2011, no more than $245,000 of the employee's compensation can be taken into account when figuring contributions..

Form W-2 Reporting for Elective Deferrals

Employee's elective deferrals are excluded from federal income taxes. Do not include them in box 1 of Form W-2.

However, elective deferrals are subject to social security and Medicare taxes, so you must include them in boxes 3 and 5, and complete box 12 of Form W-2.

Automatic Enrollment in a 401(k) Plan

Your 401(k) plan can have an automatic enrollment feature.

This feature allows you to automatically reduce an employee's pay by a fixed percentage and contribute that amount to the 401(k) plan on his or her behalf unless the employee affirmatively chooses not to have his or her pay reduced or chooses to have it reduced by a different percentage.

These contributions qualify as elective deferrals.

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Qualified Plans: Limits on Contributions and Benefits; Contribution Restriction for Self-Employed Persons

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