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Bill
Bill, Enrolled Agent
Category: Tax
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Experience:  EA, CEBS - 34 years experience providing financial advice
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A self employed person contributed too much to his SEP for

Resolved Question:

A self employed person contributed too much to his SEP for 2009. I believe taxpayer must amend 2009 reflecting the proper maximum deduction of 25%. The excess doesn't have to be withdrawn, but can be used to fund 2010. Also does taxpayer have to pay any excise tax on the excess contribution in 2009?
The account is an SEP-IRA. Taxpayer is 73. Can taxpayer still contribute/and is taxpayer subject to RMD rules?
Thank you in advance for your response. Taxpayer has no employees.
Submitted: 4 years ago.
Category: Tax
Expert:  Bill replied 4 years ago.

Bill :

What dates did the taxpayer make 2009 SEP contributions? Did the taxpayer claim more than the 25% limit on his tax return?

Customer :

SEP contributon was made in 2010 prior to April 15, 2010. SEP was established approx 2007.

Customer :

Yes, taxpayer claimed $20,000. duduction on 2009 1040. Max deduction was limited to $11.355. Schedule C profit was $61,093.

Customer :

($61,093 less 1/2 SE tax of $4,316) @ 20%= $11,355.

Bill :

The SEP contribution could remain in the account and be applied towards his 2010 SEP contribution since it was made this year. The SEP IRA trustee only reports SEP contributions on Form 5498 in the year they are is received, not the actual year that the contributions apply towards. The taxpayer would not have to pay an excise tax since it would be applied towards 2010. As long as the taxpayer continues to have self-employment income, the taxpayer can continue to make and deduct SEP contributions. However, taxpayer must still take RMDs.

Bill :

The taxpayer should file an amended return to correct the erroneous deduction amount.

Customer :

Thank you for your response.

Customer :

One more question. What happens if 2010 SE income is not high enough to absorb the remaining excess contribution? Should the excess be withdrawn? Would an excise tax apply?

Bill :

If his 2010 SE income is not high enough (less than about $46,700) to cover the excess, then the exess should be removed. If it is removed prior to his tax return filing date then an excise tax would not apply.

Customer :

Thank you so much for all your help.

Bill :

One last comment, if an excess amount is going to be removed prior to the return filing date, then the earnings on the excess (from the date of the contribution up until the date the excess is removed) must also be included.

Bill, Enrolled Agent
Category: Tax
Satisfied Customers: 3078
Experience: EA, CEBS - 34 years experience providing financial advice
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Bill
Bill
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EA, CEBS - 34 years experience providing financial advice