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Need Some Deductions for 2011?

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11 Most Overlooked Tax Deductions

Updated for 2011

SEP Plans

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Deductible SEP-IRA Contributions

Employees:

Figuring SEP-IRA contributions made on behalf of your employees is straight forward:

Special Computation for Self-Employed Persons

Figuring your own deductible contribution is not as straight forward as it is for your employees.

You must determine:

Figuring your deductible contribution is a three-step process:

  1. Figure your net earnings from self-employment
  2. Figure your reduced contribution rate
  3. Figure your maximum deductible contribution

STEP 1:

Figure your net earnings from self-employment.

Net earnings from self-employment equals:

Note: If you're self-employed, you deduct your own SEP contributions on Form 1040, line 28 (tax year 2011).

STEP 2:

Figure your reduced contribution rate.

Since your deduction for your own contributions and your net earnings depend on each each other, you determine your deductible contributions indirectly by reducing the rate stated in the plan document.

To figure your reduced rate, you divide the plan rate (the numerator) by 1 plus the plan rate (the denominator).

Assume the plan rate is 10% (.10):

STEP 3: Figure your maximum deductible contribution.

Example:

You're a Schedule C filer.

  • The SEP plan contribution rate is 10%.
  • Schedule C shows a net profit of $80,000.
  • Your deduction for one-half of your self-employment tax (deducted on Form 1040, line 27) is $5,652.

Step 1: Figure your net earnings from self-employment.

Subtract one-half of your self-employment tax liability deducted on Form 1040, line 27 from your Schedule C net profit, line 31.

  • $80,000 minus $5,652 = $74,348.

Net earning from self-employment: $74,348

Step 2: Figure your reduced contribution rate.

Your plan rate is 10%.

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

  • 1 + .10 = 1.10 (110.0%)
  • .10/1.10 =.090909

Step 3: Figure your maximum deductible contribution.

Your maximum deductible contribution is: $6,759, figured as follows:

  • $74,348 (STEP 1) x .090909 (STEP 2) = $6,759
  • Your maximum deductible SEP-IRA contribution is $6,759

Where to deduct your SEP-IRA contribution:

Next:

SEP Plans: Setting Up a SEP Plan; STEP 1: Formal Written Agreement

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