Category: Individuals Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com I refer to your fax of May 12, 1997. Taxpayer is self-employed and has net Schedule C income of $4,796. He has contributed $2,000 to a SEP/IRA. Taxpayer's spouse has W-2 income of $41,824. She also has a Schedule C business with $50,060 of net income. She contributed $6,200 to a SEP/IRA. Neither of her employers have a qualified retirement plan. The only issue is the deductibility of the plan contributions described above. I assume the taxpayer files jointly with his spouse and AGI exceeds $50,000. I assume further that there is no qualification issue with respect to the two SEP and there is no issue of reasonable compensation. I assume that the only issue is the various limitations placed on the amount of deductible plan contributions. As I understand it, we have contributions pursuant to an existing SEP. Even though the vehicle for holding the contributions is an IRA, the contributions are SEP contributions, not IRA contributions. For IRA contributions, there is an issue about whether a taxpayer is an active participant in a qualified employer plan. If so, the amount of any deductible IRA contribution is limited. In this case, the wife has her own SEP. Her SEP coverage in conjunction with AGI in excess of $50,000 would preclude either spouse from making a deductible IRA contribution. The maximum deduction for a SEP contribution is 15% of compensation. As you know, for self-employed people the limitation is based on income after the SEP contribution and after the reduction for one-half of self-employment tax. In the end, the limitation is 13.0435% of net earnings after reduction for one-half of the SE tax. Using that standard, it is apparent that the wife's contribution of $6,200 is fully deductible. I believe her maximum deduction would be $6,273. However, it seems that the husband's contribution should only be partially deductible. Contributions to an IRA are limited to the lesser or earned income or $2,000. SEP contributions are strictly limited based on a percentage of income as discussed above. It seems to me the husband's limitation should be $581 which is 13.0435% of $4,796 net income less $339 (one-half the SE tax). It seems to me that it would be permissible to leave the excess contribution ($2,000-$581=$1,419) as a nondeductible IRA contribution.
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