2 tax questions (self employed)

[Earl E Retyre]

I have 2 questions I was hoping someone can help with …

(1) I wanted to confirm that for 2018, I can contribute to a SEP IRA, a traditional IRA and DW can contribute to a traditional IRA all in the same year. I believe the SEP is limited to 20% of Net profit, and the 2 traditional IRAs is limited to $6,500 per IRA (both over 50 years of age). All correct?

(2) I wanted to confirm that the new 2018 tax reform changes for pass through businesses (199A) allows me to deduct 20% of net income. The document I read said something about long term capital gains - but did not understand what capital gains has to do with this?

Also, I believe the 199A deduction does not reduce my MAGI used for ACA calculations since I think it is subtracted after adjusted gross income. Correct?

 

[Sunset]

Answer (1) - yes as long as you already have the SEP set up. Personally I prefer a solo-401K for sole proprietorship, but it may be too late to set it up for this year. You also have to have earned enough $$ so that would be $13,000 for both of you to contribute to the traditional IRA's.
Solo-401K is limited to 25% of Net.

 

[MissMolly]

The employer part of a Solo 401K is limited to either 20% or 25% depending on whether it's a sole proprietor or partnership. However, for the employee portion (for 2018) you can also contribute up to $18,500 if under 50 and up to $24,500 if 50 or over. All total, the amounts combined (employer and employee) cannot exceed your total net income AND cannot exceed $55,000 (for 2018).

 

[USGrant1962]

Answer (1) - yes as long as you already have the SEP set up. Personally I prefer a solo-401K for sole proprietorship, but it may be too late to set it up for this year. You also have to have earned enough $$ so that would be $13,000 for both of you to contribute to the traditional IRA's.
Solo-401K is limited to 25% of Net.

Individual 401(k) is even better than that. For 2018, you can contribute up to $18,500 as an Employee Contribution, plus up to 20% (for sole proprietor, 25% for a corporation) of net as Employer contribution. Total is limited to $55K.

So up to $18.5K net income you can contribute 100%.

For all of these plans you need to understand the interactions with the Self-employed health insurance premium deduction and the 20% QBI deduction. I'm still trying to understand those myself.

Here's a good reference site: https://www.mysolo401k.net/solo-401k/solo-401k-contribution-limits-and-types/

 

[cathy63]

Also, I believe the 199A deduction does not reduce my MAGI used for ACA calculations since I think it is subtracted after adjusted gross income. Correct?

Yes, this is correct. Your MAGI is your AGI from 1040 line 7 plus/minus a few types of income. The QBI is on 1040 line 9 and is part of figuring your taxable income on line 10.

 

[Onward]

I believe the SEP is limited to 20% of Net profit

It's a roundabout formula (best executed by your accountant or your tax software) and in my experience comes closer to 19% of net profit. It's not a simple 20%.

 

[Bir48die]

Not to be confusing but I think the answer to #2 depends on gross sales. Could be wrong.

 

[PaddyMac]

To arrive at the maximum amount to contribute to a SEP-IRA, you're better off using a worksheet. You also need to know your Self-Employment tax when you do the worksheet. It's around 20%, not 25%, of net.

Recommend you get a Vanguard Individual 401k instead. There is just enough time - takes about a week to 10 days if you jump on it (file for an EIN for the plan online). Then you can save a flat amount, with no complex math, in the EmployEE side during the year. When you file taxes, you can always throw more into the EmployER side if it helps to reduce taxes. You can also add a Roth 401k to the plan (even if you don't qualify for a Roth IRA).

You can open a 401k until the end of December or a SEP until the day you file taxes. You can fund both up until the day you file, including extensions.

 

[sheehs1]

I have 2 questions I was hoping someone can help with …

(2) I wanted to confirm that the new 2018 tax reform changes for pass through businesses (199A) allows me to deduct 20% of net income. The document I read said something about long term capital gains - but did not understand what capital gains has to do with this?

Also, I believe the 199A deduction does not reduce my MAGI used for ACA calculations since I think it is subtracted after adjusted gross income. Correct?

Even the big tax software companies have had a hard time incorporating all the changes in the tax software updates (according to my CPA). The latest version as of two weeks ago, still has glitches in it. My CPA ran projections for me.

The Gross Domestic Activity Production credit was "out" and is now just recently since November, back "in" - but our year end is May, which meant some activity was in 2017. (crossing calendar tax years). This may not apply to you. We are a light manufacturer.

In my case, the 199A 20% pass thru doesn't appear to be a straight line calculation and is based on "Adjusted Gross Income", your wages not exceeding $154,000 ish, and has something to do with 2 1/2% of the unadjusted basis of depreciable assets (depending) as well as perhaps other things. All very confusing. I did not get the full 20% pass thru. Preliminarily, on my projection it is only 21% of the a straight line calculation for the 20% pass thru.

If you have stayed under the $154,000, you may have more success in capturing more of the 20% pass thru.

Because we are loosing other "deductions"and some are "capped", my own taxes are not lower than prior year. But I expected this.

 

[Stormy Kromer]

Make a quick call to your tax preparer.

 

[kgtest]

The employer part of a Solo 401K is limited to either 20% or 25% depending on whether it's a sole proprietor or partnership. However, for the employee portion (for 2018) you can also contribute up to $18,500 if under 50 and up to $24,500 if 50 or over. All total, the amounts combined (employer and employee) cannot exceed your total net income AND cannot exceed $55,000 (for 2018).

+1 This is how I approach my S-corp, as 100% shareholder.