Still Possible to Lower my 2019 Taxes?

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Topic Author
AbsoluteZero
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Still Possible to Lower my 2019 Taxes?

Post by AbsoluteZero » Thu Jun 25, 2020 8:56 am

Hi Gurus,

Hope you are doing well and keeping safe.

Would you be able to advise me on how to lower my taxes for 2019?

We file a joint return with Schedule C, I was self employed for 8 months ( did not create any company for tax saving) and for the rest of 2019, I worked at a Company. .

We are maximizing on traditional iRA, my wife also made some contribution to work 401k. On about 100k Gross income, we will have to pay around 16-18k in Federal taxes alone.

At this late stage, is there anything we can do reduce our taxes for 2019? Maybe open solo 401k?

I appreciate your time.

Thank you very much.

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David Jay
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Re: Still Possible to Lower my 2019 Taxes?

Post by David Jay » Thu Jun 25, 2020 12:43 pm

Welcome to the forum!
AbsoluteZero wrote:
Thu Jun 25, 2020 8:56 am
Maybe open solo 401k?
It appears so, but you will have to “get on it” to get it done by July 15. Link here: https://www.mysolo401k.net/making-2019- ... y-15-2020/
Prediction is very difficult, especially about the future - Niels Bohr | To get the "risk premium", you really do have to take the risk - nisiprius

niceguy7376
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Re: Still Possible to Lower my 2019 Taxes?

Post by niceguy7376 » Thu Jun 25, 2020 1:00 pm

AbsoluteZero wrote:
Thu Jun 25, 2020 8:56 am
On about 100k Gross income, we will have to pay around 16-18k in Federal taxes alone.
Welcome to the forum. For 100k income of MFJ and even with a standard deduction of 24K, leaving 76K as income, I am curious as to why you need to PAY 16-18K in federal taxes alone. That doesnt look right.
Rough estimate is 0% on first 20K
12% from 20 to 76K = 12%*56K = 6720

the way
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Re: Still Possible to Lower my 2019 Taxes?

Post by the way » Thu Jun 25, 2020 1:03 pm

David Jay wrote:
Thu Jun 25, 2020 12:43 pm
Welcome to the forum!
AbsoluteZero wrote:
Thu Jun 25, 2020 8:56 am
Maybe open solo 401k?
It appears so, but you will have to “get on it” to get it done by July 15. Link here: https://www.mysolo401k.net/making-2019- ... y-15-2020/
It has to be open already. Contributions still allowed though.

18k on 100k seems high, most like 8k. I guess self-employment tax would be 9k on 60k income though. You can deduct any business expenses first.

fabdog
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Re: Still Possible to Lower my 2019 Taxes?

Post by fabdog » Thu Jun 25, 2020 1:05 pm

At this late stage, is there anything we can do reduce our taxes for 2019? Maybe open solo 401k?
No. the solo 401K would have needed to be opened by Dec 31, 2019, even if contributions would be made in 2020 for 2019. So you have missed that opportunity

If still having self employment in 2020, you can open one now for 2020

Mike

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Thu Jun 25, 2020 1:13 pm

AbsoluteZero wrote:
Thu Jun 25, 2020 8:56 am
We file a joint return with Schedule C, I was self employed for 8 months ( did not create any company for tax saving) and for the rest of 2019, I worked at a Company.
You do not need to "create a company" to take business tax deductions. You can deduct business expenses on your Schedule C.

You can open and contribute to a SEP for 2019 up to your filing deadline, which is July 15.

Topic Author
AbsoluteZero
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Re: Still Possible to Lower my 2019 Taxes?

Post by AbsoluteZero » Fri Jun 26, 2020 7:07 am

Thank you All for responding. :happy

JonnyB:

I was reading the eligibility requirement and not sure how underlined below will apply in my case. I am freelancer and work on different projects.

"Generally, employees must be allowed to participate if they are older than 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years."

niceguy7376:

I also have to pay around 15% self employment tax (100% of Social Security & Medicare instead of 50%). But indeed even with that my taxes seems to be high, that is why I am considering SEP IRA as it will be treated as business expense and lower my self employment income. Currently, my home office expenses are quite low.

Thanks.

Spirit Rider
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Re: Still Possible to Lower my 2019 Taxes?

Post by Spirit Rider » Fri Jun 26, 2020 8:58 am

AbsoluteZero wrote:
Fri Jun 26, 2020 7:07 am
I was reading the eligibility requirement and not sure how underlined below will apply in my case. I am freelancer and work on different projects.

"Generally, employees must be allowed to participate if they are older than 21, earn at least $600 annually, and have worked for the same employer in at least three of the past five years."
The SEP IRA eligiblity requirements apply to all employees including yourself.

However, those are the maximum eligibility requirements. You can lower or have no age or years of service requirement and have no minimum compensation requirement.

On IRS Form 5305-SEP or the custodian's equivalent. Elect no > the individual maximum eligibility requirement that applies to you. You can elect lower if you want to cover such future employees.
  • Age 21 unless you are younger
  • Three (3) years unless the business has existed < three years prior to 2019. For example, if you started the business in 2017 and elected three years, you would be ineligible to receive 2019 SEP IRA employer contributions.
  • Elect the compensation restriction only if you do not anticipate years with < $600 in compensation.
AbsoluteZero wrote:
Fri Jun 26, 2020 7:07 am
I am considering SEP IRA as it will be treated as business expense and lower my self employment income.
This is incorrect.

A self-employed individual's retirement plan contributions are not a business expense and will not lower self-employment taxes.

A business owner's contributions are not deducted on Schedule C. They are deducted on their Form 1040 Schedule 1.

retiredjg
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Re: Still Possible to Lower my 2019 Taxes?

Post by retiredjg » Fri Jun 26, 2020 9:26 am

I think you need to take a closer look at why the tax is so high. Doesn't seem right to me either. Is that what a tax-preparer or your tax software told you or did you take a guess?

Depending on what "abut $100k" means, you may not be eligible to deduct contributions to traditional IRA in 2019.

Maybe if you posted all the numbers, people could help more.

Topic Author
AbsoluteZero
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Re: Still Possible to Lower my 2019 Taxes?

Post by AbsoluteZero » Fri Jun 26, 2020 9:47 am

Thank you retiredjg & Spirit Rider.

I will post my more numbers this week end after inputting them in tax software.

Stay Safe.

tibbitts
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Re: Still Possible to Lower my 2019 Taxes?

Post by tibbitts » Fri Jun 26, 2020 10:46 am

Unfortunately you've discovered after the fact that here is considerable overhead to operating your own business. A good part of your taxes will probably be employment taxes and not income taxes. In any case you needed to be paying those taxes all along, not just at the end of the year, so you may have penalties to deal with as well if you haven't been doing that.

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Fri Jun 26, 2020 10:47 am

Spirit Rider did a good job of explaining the SEP Form 5305. The purpose of the form is to ensure that all employees are treated equally and fairly. But in your case, you are the only employee, so you are describing yourself. Just put in zero of number of years for eligibility.

1. You can deduct up to 25% of your self-employment income as a contribution to your SEP. This is entered on Schedule 1.

2. Your self-employment tax is 15.3%, but one-half of that is a deduction on Schedule 1 and appears on line 8a of your Form 1040 as a deduction.

3. You can deduct health insurance premiums you paid while self-employed for you and your family. This also is entered on Schedule 1.

4. As far as business expenses, you probably want to take the Home Office Deduction if you can. You will probably want to do the simplified method. You just deduct $5 per square foot of office space. You will have to pro-rate it if it was only used for business for 8 months of the year. You don't need a separate room as an office. You can just consider your desk and filing cabinet as your office, even if it is only 20 square feet.

5. The home office deduction isn't much by itself but it plays a much more important factor. If you have a home office, then all of the travel to and from your home and your client's location is deductible at 58 cents per mile. If you traveled there every day, that can amount to thousands of deductible miles. You need records to support your mileage claim and you can create those from your work records. You know how many days you worked and you can use google maps to determine the round trip mileage for each day.

6. Also, there is a limit of $132,900 for combined W-2 FICA and self-employment income tax. If your W-2 and Schedule C income combined exceeds that amount, this reduces both the employer and employee halves of the SE tax. This is one of the advantages of Schedule C vs S-corp if you also have other wage income.

Topic Author
AbsoluteZero
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Re: Still Possible to Lower my 2019 Taxes?

Post by AbsoluteZero » Fri Jun 26, 2020 12:18 pm

Thanks Tibbitts & JonnyB :D


Tibbitts:
I have regularly paid both Federal & State estimated taxes till 3rd quarter. I am anticipate no penalties-Hopefully . 8-)

JonnyB:

Lot of useful info to absorb. I have no medical expenses as I am covered by my wife plan and no work related travel either. I will post more numbers this weekend so that you Gurus can eye ball them and help with their expertise.

Topic Author
AbsoluteZero
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Re: Still Possible to Lower my 2019 Taxes?

Post by AbsoluteZero » Sat Jun 27, 2020 9:11 am

Hi,

I have some more questions. :confused

a.) If I invest about $16500 (25% of Profit) in SEP IRA in 2019, We will still owe $1286 in taxes. I have already paid $14,800 in taxes and would like to lower my taxes further. We are already maximizing the Traditional IRA. Are there any other mechanisms available ?

b.) Since I am 61+, will I be able to withdraw these funds, if needed, in 2020 with out any penalty. Are the any fees charged by brokers or surcharges etc on distributions?

c.) I am using H&R Block software for preparing taxes and one of the question is, is this plan a salary reduction simplified employee pension (SARSEP)? Not sure if answer Yes and No. If I select yes, it refers me to iRS Publication 560, otherwise it suggests what the contribution amount should be based on profitability number.

Thank you. I appreciate your time.

the way
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Re: Still Possible to Lower my 2019 Taxes?

Post by the way » Sat Jun 27, 2020 11:10 am

AbsoluteZero wrote:
Sat Jun 27, 2020 9:11 am
a.) If I invest about $16500 (25% of Profit) in SEP IRA in 2019, We will still owe $1286 in taxes. I have already paid $14,800 in taxes and would like to lower my taxes further. We are already maximizing the Traditional IRA. Are there any other mechanisms available ?
Do you have a family HDHP plan and contribute the max to the HSA already? (7k + 1k + 1k)

With 100k gross income, you're already in a very low bracket, 12%. (The SEP saves you about 2k taxes now, which you may owe later when you withdraw at your marginal tax bracket.)

With 66k self emp income, your self emp taxes are around 10k. There's no way around that unless you have more business deductions.

Your income tax is:

100k gross
-16.5 sep
-7 trad ira
-7 trad ira
-5 self emp tax ded
-24.4 standard ded
=====
40.1k taxable income

so income tax is about 4.4k

That's a little less than the 16k total you mentioned, so you maybe the 100k gross is a little off? If your MAGI is over 103k then some of your trad iras would be not deductible. Check your 1040 to see exactly what amounts you are paying.

fyre4ce
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Re: Still Possible to Lower my 2019 Taxes?

Post by fyre4ce » Sat Jun 27, 2020 12:22 pm

JonnyB wrote:
Fri Jun 26, 2020 10:47 am
Spirit Rider did a good job of explaining the SEP Form 5305. The purpose of the form is to ensure that all employees are treated equally and fairly. But in your case, you are the only employee, so you are describing yourself. Just put in zero of number of years for eligibility.

1. You can deduct up to 25% of your self-employment income as a contribution to your SEP. This is entered on Schedule 1.

2. Your self-employment tax is 15.3%, but one-half of that is a deduction on Schedule 1 and appears on line 8a of your Form 1040 as a deduction.

3. You can deduct health insurance premiums you paid while self-employed for you and your family. This also is entered on Schedule 1.

4. As far as business expenses, you probably want to take the Home Office Deduction if you can. You will probably want to do the simplified method. You just deduct $5 per square foot of office space. You will have to pro-rate it if it was only used for business for 8 months of the year. You don't need a separate room as an office. You can just consider your desk and filing cabinet as your office, even if it is only 20 square feet.

5. The home office deduction isn't much by itself but it plays a much more important factor. If you have a home office, then all of the travel to and from your home and your client's location is deductible at 58 cents per mile. If you traveled there every day, that can amount to thousands of deductible miles. You need records to support your mileage claim and you can create those from your work records. You know how many days you worked and you can use google maps to determine the round trip mileage for each day.

6. Also, there is a limit of $132,900 for combined W-2 FICA and self-employment income tax. If your W-2 and Schedule C income combined exceeds that amount, this reduces both the employer and employee halves of the SE tax. This is one of the advantages of Schedule C vs S-corp if you also have other wage income.
This is all great advice, but I'm not crazy about the $5/sqft deduction. Here in SoCal, we pay about $40/sqft/year, eight times the simplified rate. Others seem to like the simplified rate too, but our rent, utilities, cleaning expenses are what they are, and they would be very easy to prove in an audit. Is there something I'm missing for the simplified rate?

Topic Author
AbsoluteZero
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Re: Still Possible to Lower my 2019 Taxes?

Post by AbsoluteZero » Sat Jun 27, 2020 1:38 pm

Please see the detail of home office expenses by clicking the link below. I am unable to paste image here.

https://drive.google.com/file/d/1IGBjR0 ... sp=sharing

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Sat Jun 27, 2020 2:39 pm

AbsoluteZero wrote:
Sat Jun 27, 2020 1:38 pm
Please see the detail of home office expenses by clicking the link below. I am unable to paste image here.

https://drive.google.com/file/d/1IGBjR0 ... sp=sharing
Just be aware that the depreciation deduction you claim must be recaptured when you sell your home. You must keep track of every year of accumulated depreciation as long as you live in the home. This sum is added to your income and taxed at 25% in the year you sell your home. The recapture tax is not reduced by the home sale tax exclusion.

aristotelian
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Re: Still Possible to Lower my 2019 Taxes?

Post by aristotelian » Sat Jun 27, 2020 2:47 pm

It sounds like most of your tax is FICA due to you both having SE income. If it is any consolation, FICA tax is necessary to earn SS credits, and even if you have credits the FICA taxes increase your SS payment. You should be getting pretty decent ROI on those dollars.

Does your W2 company have a retirement plan? What do you do for health insurance? This may not help for 2019 but HDHP would enable you to open a HSA for $7100 pretax. Not sure how those work with SE, but those contributions also avoid FICA for regular employees.

Spirit Rider
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Re: Still Possible to Lower my 2019 Taxes?

Post by Spirit Rider » Sat Jun 27, 2020 4:43 pm

AbsoluteZero wrote:
Sat Jun 27, 2020 9:11 am
a.) If I invest about $16500 (25% of Profit) in SEP IRA in 2019
Self-employed employer contributions are 25% of compensation, not 25% of business profits

However, self-employed employer contributions are not compensation and they themselves reduce compensation. Therefore, self-employed employer contributions are calculated as 20% of net earnings from self-employment (business profit - 1//2 SE tax).

These calculations at this point are best left to tax preparation software.
b.) Since I am 61+, will I be able to withdraw these funds, if needed, in 2020 with out any penalty. Are the any fees charged by brokers or surcharges etc on distributions?
Yes, you can take SEP IRA distributions >= age 59 1/2 without penalty, but subject to ordinary income taxes. As long as you use one of the low cost brokerages for their own index funds or brokerages with no transaction costs for ETFs and other securities. There will be no fees/surcharges except for the tiny fractional SEC charges.
c.) I am using H&R Block software for preparing taxes and one of the question is, is this plan a salary reduction simplified employee pension (SARSEP)? Not sure if answer Yes and No. If I select yes, it refers me to iRS Publication 560, otherwise it suggests what the contribution amount should be based on profitability number.
No, a SARSEP IRA is legacy grandfathered plan that allowed employee deferrals in addition to employee contributions and hasn't been available for new adoption since 1997.

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Sat Jun 27, 2020 8:37 pm

Also note that your SEP is just another traditional IRA. In fact, you can make your annual elective IRA contributions directly to your SEP if you like, instead of a separate IRA. That's $7,000 if you are over age 50. Or you can rollover your SEP contributions to a traditional IRA if that is more convenient.

You can also convert your SEP contribution to a Roth, making it similar to a Roth 401(k). You make your contribution to the SEP one day and convert it to a Roth the next day, the same as any other IRA. Of course, as with the Roth 401(k), the contribution then becomes taxable.

Topic Author
AbsoluteZero
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Re: Still Possible to Lower my 2019 Taxes?

Post by AbsoluteZero » Sun Jun 28, 2020 5:25 pm

Thank you all for your input. :happy

My Federal Tax Summary & key figures:

I am hoping I made a mistake and did not take take adjustment or deduction for self employment. My SE taxes are 14% of SE income!!!

Image



JonnyB:

Not sure I fully understand you statementent below.
Also note that your SEP is just another traditional IRA. In fact, you can make your annual elective IRA contributions directly to your SEP if you like, instead of a separate IRA.
I thought I could only contribute about $16,745 to SEP IRA Max. Are you indicating that I could possibly contribute approx $16.7k plus my Traditional RA $7k plus my wife's Traditional IRA % 5.9K to SEP IRA and get the same tax breaks ?

Thank you.

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Sun Jun 28, 2020 8:43 pm

AbsoluteZero wrote:
Sun Jun 28, 2020 5:25 pm


JonnyB:

Not sure I fully understand you statementent below.
Also note that your SEP is just another traditional IRA. In fact, you can make your annual elective IRA contributions directly to your SEP if you like, instead of a separate IRA.
I thought I could only contribute about $16,745 to SEP IRA Max. Are you indicating that I could possibly contribute approx $16.7k plus my Traditional RA $7k plus my wife's Traditional IRA % 5.9K to SEP IRA and get the same tax breaks ?

Thank you.
Your SEP is just another traditional IRA. So your $16K is the employer contribution. You can also make your $7K employee contribution to the same SEP instead of making it to a separate IRA. You can only make one $7K IRA contribution. It makes no difference if you put it in your SEP or a separate Traditional IRA. It's treated exactly the same on your tax return. They are both regarded as Traditional IRAs.

If you already have a Traditional IRA, you can make your $7K contribution to it as usual. If you don't already have a Traditional IRA, you can use your SEP for the same purpose. On Schedule 1, the $16K goes on line 15. Your $7K goes on line 19 whether you put it in your SEP or your separate IRA, plus the $6K for spouse.

If you make both of your contributions to your SEP, you must make clear to your custodian that the $16K is an employer contribution for 2019 and the $7K is an employee contribution for 2019. If you do this online at your broker, there should be check boxes to indicate separate employer and employee contributions.

Your spouse's IRA contribution must go into their own IRA. Remember, IRA stands for Individual Retirement Account. Each individual must have their own.

Spirit Rider
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Re: Still Possible to Lower my 2019 Taxes?

Post by Spirit Rider » Sun Jun 28, 2020 11:01 pm

Just because you can do something does not mean you should do something. I would never make traditional IRA contributions to a SEP IRA account. This capability is really only to facilitate a "payroll deduction IRA" for W-2 employees at an employer with a SEP IRA.

Is it really such a major inconvenience to have a SEP IRA to make employer retirement plan contributions and a separate traditional IRA for your personal contributions. Not to mention, you can not track the basis of non-deductible traditional IRA contributions made anywhere other than to a traditional IRA account on Form 8606. In other words, you can not do a Backdoor Roth via a SEP IRA.

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Mon Jun 29, 2020 12:49 am

Spirit Rider wrote:
Sun Jun 28, 2020 11:01 pm
Just because you can do something does not mean you should do something. I would never make traditional IRA contributions to a SEP IRA account. This capability is really only to facilitate a "payroll deduction IRA" for W-2 employees at an employer with a SEP IRA.
No, it isn't just for payroll deductions. As a sole proprietor you don't have payroll. You simply make your annual IRA contribution to your SEP, just like any other IRA. For example, at Vanguard they even keep track of your "employee" contributions to make sure you don't exceed the annual limit. They know your age and will limit to $6K or $7K as appropriate.
Is it really such a major inconvenience to have a SEP IRA to make employer retirement plan contributions and a separate traditional IRA for your personal contributions. Not to mention, you can not track the basis of non-deductible traditional IRA contributions made anywhere other than to a traditional IRA account on Form 8606. In other words, you can not do a Backdoor Roth via a SEP IRA.
You can track your contributions on Form 8606 just as for a regular IRA. The SEP is just an IRA. No different. You can do backdoor Roth conversions if you like, keeping in mind that your employer contributions are pre-tax and must be pro-rated. But that is no different from any other IRA. You are responsible for keeping track of basis, not your custodian.

Rather than think of a SEP as a pension plan that you can also put IRA contributions in, just think of a SEP as an IRA that your employer can also put contributions in.

Spirit Rider
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Re: Still Possible to Lower my 2019 Taxes?

Post by Spirit Rider » Mon Jun 29, 2020 7:47 am

JonnyB wrote:
Mon Jun 29, 2020 12:49 am
No, it isn't just for payroll deductions. As a sole proprietor you don't have payroll. You simply make your annual IRA contribution to your SEP, just like any other IRA. For example, at Vanguard they even keep track of your "employee" contributions to make sure you don't exceed the annual limit. They know your age and will limit to $6K or $7K as appropriate.
I never said a self-employed individual or any individual for that matter couldn't make direct traditional IRA contributions to a SEP IRA. The ability to do so just makes it easier for an employer with many W-2 employees to offer a payroll deduction IRA. It is just as easy for an individual to make direct contributions to a traditional IRA account. What is the important benefit of making them to a SEP IRA.
You can track your contributions on Form 8606 just as for a regular IRA. The SEP is just an IRA. No different.
That is not correct. A 408(k) SEP IRA does incorporate much of Section 408, just not for contributions

IRS Form 8606 Part I

Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs
Complete this part only if one or more of the following apply.
  • You made nondeductible contributions to a traditional IRA.
  1. Enter your nondeductible contributions to traditional IRAs.

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Mon Jun 29, 2020 11:17 am

Spirit Rider wrote:
Mon Jun 29, 2020 7:47 am
JonnyB wrote:
Mon Jun 29, 2020 12:49 am
No, it isn't just for payroll deductions. As a sole proprietor you don't have payroll. You simply make your annual IRA contribution to your SEP, just like any other IRA. For example, at Vanguard they even keep track of your "employee" contributions to make sure you don't exceed the annual limit. They know your age and will limit to $6K or $7K as appropriate.
I never said a self-employed individual or any individual for that matter couldn't make direct traditional IRA contributions to a SEP IRA. The ability to do so just makes it easier for an employer with many W-2 employees to offer a payroll deduction IRA. It is just as easy for an individual to make direct contributions to a traditional IRA account. What is the important benefit of making them to a SEP IRA.
And what is the important benefit of making them to a separate IRA. Why keep track of multiple Traditional IRAs for absolutely no benefit from doing so?

The IRS says:
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.
You can make non-deductible contributions to your SEP. You track them on Form 8606. The SEP is a Traditional IRA.

The IRS also says:
Because a SEP-IRA is a traditional IRA, you may be able to make regular, annual IRA contributions to this IRA, rather than opening a separate IRA account.
You can make non-deductible contributions to a SEP. You can rollover contributions from a non-deductible IRA to a SEP. You track your non-deductible contributions the same as any other traditional IRA. Are you claiming that you simply lose all basis for non-deductible contributions to a SEP? No, you treat your SEP just like a traditional IRA.

Spirit Rider
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Re: Still Possible to Lower my 2019 Taxes?

Post by Spirit Rider » Mon Jun 29, 2020 4:54 pm

Duplicate partial post. I inadvertently saved before finishing.

See next complete post.
Last edited by Spirit Rider on Mon Jun 29, 2020 5:43 pm, edited 1 time in total.

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Mon Jun 29, 2020 5:12 pm

I'll just say that, in the days before Solo 401(k), I have made non-deductible contributions to a SEP. I have tracked the basis and made Roth conversions appropriately pro-rating basis. Your position that non-deductible contributions have no basis is absurd.

You can do anything with a SEP IRA you can do with a traditional IRA. You can make deductible contributions. You can make non-deductible contributions. You can make Roth conversions. You can rollover SEP IRAs into Traditional IRAs. You can rollover Traditional IRAs into SEP IRAs, including traditional IRAs with non-deductible contributions with basis.

Don't know why you are making such a big deal about this. Lumpers vs splitters. Take your pick. You can have lots of IRAs if you like to have lots of separate bins. You can have one SEP IRA if you like to keep things simple. As far as the IRS is concerned, they consider all of your separate Traditional IRAs to be one big IRA, including SEPs.

Spirit Rider
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Re: Still Possible to Lower my 2019 Taxes?

Post by Spirit Rider » Mon Jun 29, 2020 5:23 pm

JonnyB wrote:
Mon Jun 29, 2020 11:17 am
Spirit Rider wrote:
Mon Jun 29, 2020 7:47 am
I never said a self-employed individual or any individual for that matter couldn't make direct traditional IRA contributions to a SEP IRA. The ability to do so just makes it easier for an employer with many W-2 employees to offer a payroll deduction IRA. It is just as easy for an individual to make direct contributions to a traditional IRA account. What is the important benefit of making them to a SEP IRA.
And what is the important benefit of making them to a separate IRA. Why keep track of multiple Traditional IRAs for absolutely no benefit from doing so?
I see how you so conveniently and selectively quoted the above text while omitting my critical quote from IRS From 8606. I re-quote just the Part I title here;
  • "Part I Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs"
JonnyB wrote:
Mon Jun 29, 2020 11:17 am
The IRS says:
If the SEP-IRA permits non-SEP contributions, you can make regular IRA contributions (including IRA catch-up contributions if you are age 50 and older) to your SEP-IRA, up to the maximum annual limit. However, the amount of the regular IRA contribution that you can deduct on your income tax return may be reduced or eliminated due to your participation in the SEP plan.
You can make non-deductible contributions to your SEP. You track them on Form 8606. The SEP is a Traditional IRA.

The IRS also says:
Because a SEP-IRA is a traditional IRA, you may be able to make regular, annual IRA contributions to this IRA, rather than opening a separate IRA account.
You can make non-deductible contributions to a SEP. You can rollover contributions from a non-deductible IRA to a SEP. You track your non-deductible contributions the same as any other traditional IRA. Are you claiming that you simply lose all basis for non-deductible contributions to a SEP? No, you treat your SEP just like a traditional IRA.
None of which support your point that you can report non-deductible contributions to a SEP IRA. Only that you can make traditional IRA contributions to a SEP IRA whether you deduct them or not. Quoting the Part I title again;
  • "Part I Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs"
Since the IRS saw fit to explicitly list Traditional, SEP, and SIMPLE IRAs under distributions, don't you think their failure to include SEP IRAs under Nondeductible Contributions is probative that reporting SEP IRA non-deductible contributions on Form 8606 is not allowed.

JonnyB
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Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Mon Jun 29, 2020 5:43 pm

Doesn't bother me. I have made non-deductible contributions to a SEP and subsequently converted them to a Roth, including basis. I am not concerned about an audit. You may think differently.

At any rate, why are you obsessed about this? The original poster is not making non-deductible contributions so why does it matter to you?

Spirit Rider
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Re: Still Possible to Lower my 2019 Taxes?

Post by Spirit Rider » Mon Jun 29, 2020 5:55 pm

JonnyB wrote:
Mon Jun 29, 2020 5:43 pm
At any rate, why are you obsessed about this? The original poster is not making non-deductible contributions so why does it matter to you?
One might ask you the same question. I seek to inform the wider Boglehead community. I try to base everything I say on the Internal Revenue Code, IRS regulations, guidance and publications.

I happen to believe I am correct in this case. If someone follows my caution and I am wrong, there is no harm no foul. On the other hand if you are wrong, someone follows your lead and is audited by the IRS. There may be serious consequences.

Just because you did something in the past and suffered no consequences does not mean it was correct.

Topic Author
AbsoluteZero
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Joined: Thu Jun 25, 2020 8:47 am

Re: Still Possible to Lower my 2019 Taxes?

Post by AbsoluteZero » Mon Jun 29, 2020 8:07 pm

Gurus,

In our situation

-MFJ,
-No Travel & related expenses
-Low Home office expenses,
-No medical expenses
-Please see my previous post for more details.

In retrospect, would it have made more sense if we had registered a LLC or C Corp or S corp?

Thank you.

JonnyB
Posts: 643
Joined: Sun Jan 19, 2020 5:28 pm

Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Mon Jun 29, 2020 8:45 pm

Spirit Rider wrote:
Mon Jun 29, 2020 5:55 pm
I happen to believe I am correct in this case. If someone follows my caution and I am wrong, there is no harm no foul. On the other hand if you are wrong, someone follows your lead and is audited by the IRS. There may be serious consequences.
You're really discussing a rich people's problem. Only high income people are doing backdoor Roths. And the issue is really obsolete. It wasn't possible in the past, but now days if you are high income and planning on a backdoor Roth, then you are going to use a Solo 401(k) so that you can keep your pre-tax employer contributions separate from your IRA. You aren't going to be using a SEP in those circumstances so I don't know why you are obsessing about non-deductible SEP contributions. Lower income people using a SEP aren't faced with that issue.

Recall that you started down this silly path by declaring that it was somehow it was a bad idea to put a deductible IRA contribution in a SEP and when that didn't pan out you veered off into talking about non-deductible IRA contributions which are would be rare for a SEP.

JonnyB
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Joined: Sun Jan 19, 2020 5:28 pm

Re: Still Possible to Lower my 2019 Taxes?

Post by JonnyB » Tue Jun 30, 2020 9:28 am

Spirit Rider wrote:
Mon Jun 29, 2020 5:23 pm
[*]"Part I Nondeductible Contributions to Traditional IRAs and Distributions From Traditional, SEP, and SIMPLE IRAs"[/list]
And I don't know why you remain hung up on this language. It is still a non-deductible contribution to a traditional IRA, even if you exercise the option to deposit the non-deductible traditional IRA contribution in your SEP traditional IRA account. You seem to believe it is magically transformed into something other than a non-deductible traditional IRA contribution and what that something else might be is a mystery. It is a contribution under the regulations of a traditional IRA, subject to the contribution limits of a traditional IRA, including the catchup provision of a traditional IRA, and subject to the deductibility income limits of a traditional IRA.

The simple and obvious conclusion is that a non-deductible traditional IRA contribution is a non-deductible traditional IRA contribution regardless of whether you deposit it into a separate IRA account or a SEP IRA account.

But opinions are free. You are entitled to yours.

retiredjg
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Re: Still Possible to Lower my 2019 Taxes?

Post by retiredjg » Tue Jun 30, 2020 11:19 am

You two are getting no where. I'm not even sure this discussion is applicable to the original poster. How about a truce? Or start a separate thread.
:D :D :D

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