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Need Some Deductions for 2011?

Don't overlook these!

10 Oddball Tax Deductions

11 Most Overlooked Tax Deductions

Updated for 2011

Qualified Plans

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Special Computation for Self-Employed Persons-Continued

STEP 2:

Figure your reduced contribution rate.

Your compensation, for purposes of determining your own deductible contribution, takes into account:

  1. The deduction for one-half of your self-employment tax and
  2. The deduction for contributions on your behalf to the plan (which is unknown when you start the computation).

Reminders:

STEP 3:

Multiply net earnings from self-employment by your reduced contribution rate to determine your deductible contribution.

Maximum percentage:

The maximum deductible percentage for contributions (other than elective deferrals) to your own profit-sharing Keogh, money-purchase Keogh, or SEP is 20% and for your employees, 25%.

Publication 560 table and worksheets:

You can also use the Table and Worksheets for the Self-Employed to figure your deductible contribution.

Example:

Figuring Your Deductible Contribution if You're Self-Employed:

Here are the facts:

  • The plan rate is 10% (.10).
  • Your a Schedule C filer
  • Schedule C, line 31 shows a net profit of $40,000.
  • Form 1040, line 27 shows a $2,826 deduction for one-half of your self-employment tax liability.
    • Schedule SE was used to figure your self-employment tax.

Step 1:

Figure your net earnings from self-employment.

Your net earnings from self-employment is $37,174, figured as follows:

  • $40,000 (Schedule C, net profit) minus $2,826 (one-half of self-employment tax) = $37,174

STEP 2: Figure your reduced contribution rate.

Your reduced contribution rate is .090909, figured as follows:

  • Use the plan rate as the numerator (.10 in the example)
  • Add 1 to the plan rate to determine the denominator:
    • 1 + .10 = 1.10
  • Divide the plan rate by 1 plus the plan rate to find your reduced rate:
    • .10/1.10 = .090909

STEP 3: Multiply net earnings from self-employment (STEP 1) by your reduced contribution rate (STEP 2) to determine your deductible contribution.

Your deductible contribution is $3,379, figures as follows:

  • $37,174 (STEP 1) x .090909 (STEP 2) = $3,379

Next:

Qualified Plans: Timing Deductible Contributions; Promissory Notes

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