modififed AGI and Roth troubles

J

JGE 18 years ago

Kinda a three-part question ...

I'm a contractor who has some W-2 income (through an agency) and some 1099-MISC income. I thought it was gonna be a slow year for me, so I maxed out my Roth contribution and also converted $2000. I've also contributed close to the max for the 401K on the W2 job, and plan to do a maximum 18.5% SEP-IRA contribution off the sole-proprietor self-employment income. Turns out my AGI is looking like it's gonna be over $100K, disallowing the conversion and getting into the phase-out zone for contribution.

First question, am I computing "modifed AGI for Roth purposes" correctly ? I know to start with AGI. Then subtract the conversion $2000. I know you have to add back in a traditional IRA contribution, but it looks to me like the SEP-IRA contribution does NOT need to be added back in, because it's on line 28, not line 32, and only the latter has to be added back in. I also read somewhere that you have to add back in the adjustment for 1/2 self- employ tax, but Pub 590 doesn't seem to show that.

Second, is there ANY way to reduce my AGI now that the year has ended ? I guess the $3K+ that I fell short of maxing out the W2-job 401K is water under the bridge. The only other thing I can think of, I haven't billed for December on the 1099 job yet. Is that income reportable the year the work was done, or the year I bill it and get paid ? If the former, can I somehow defer it ? (I suppose I could "forget" to put it on my December bill, and then remember it when I bill for January, but that sounds likely to be illegal).

Third, if I *am* screwed (my AGI is over $100K, but I guess I shouldn't REALLY be complaining about that :-), how should I proceed. How big a pain is it to remove the excess Roth contribution ? Mainly I'm wondering how the heck I go about computing the earnings on the excess, since of course that must be removed too. I DON'T think I want to recharacterize, because my SEP-IRA is all pre-tax money now, and I don't want to end up with some after-tax money in there (since the recharacterized contribution won't be deductable, since my income is high and I had the 401K plan).

Thanks much, John

Vote

P

Phil Marti 18 years ago

Your SEP limit is 20% of the Schedule C bottom line, if that helps. IRS Publication 560.

You're correct on all fronts. Neither the SEP contribution nor the SE tax adjustment needs to be added back.

Assuming you're a cash-basis taxpayer (most people are) it's income when you are paid. It sounds like this, plus a maximum SEP contribution, should take care of your problem. If it doesn't, get back to us.

Vote

A

Arthur Kamlet 18 years ago

I believe the SEP limit is 20% of Schedule C net profit, less 1/2 SE tax, less above the line SE medical deduction.

Vote

J

JGE 18 years ago

Awesome. That gets me close. I coulda sworn I read SOMEWHERE that the SE-tax adjutsment DID need to be added back in, but Pub 590 seems pretty clear that it doesn't.

Yes, I use cash accounting. So to make sure I got this straight, I haven't billed for December 2007 yet, and obviously won't get paid until sometime in

2008. So that's NOT part of my 2007 SE income. That completely solves the problem, thanks. Guess I oughta call and make SURE they don't include December on my 1099 - I suppose I could simply not bill it until I get the 1099 :-)

Thanks again, John

Vote

P

Phil Marti 18 years ago

It went up to 25% of Schedule C minus the SE tax adjustment and the SEP adjustment a couple of years ago, and it winds up being 20% of the Schedule C bottom line. I've never seen anything about an effect from the medical insurance deduction.

Vote

A

Arthur Kamlet 18 years ago

Phil

When I look at Pub 560 Chapter 5 worksheet it seems the SEP is 20% of [net Sch C] less [1/2 SE tax]?

I could not find a reference to medical; not sure where I got that from?

Vote

J

JGE 18 years ago

I had TurboTax (the 2007 edition) "maximize" it for me, and it came up a figure of about 18.5%. Not that TurboTax is the end-all ...

Vote

D

Dan Lanciani 18 years ago

In article , snipped-for-privacy@panix.com (Arthur Kamlet) writes: | In article , | Phil Marti wrote: | >"Arthur Kamlet" wrote: | >

| >> I believe the SEP limit is 20% of Schedule C net profit, less 1/2 SE | >> tax, less above the line SE medical deduction. | >

| >It went up to 25% of Schedule C minus the SE tax adjustment and the SEP | >adjustment a couple of years ago, and it winds up being 20% of the Schedule | >C bottom line. I've never seen anything about an effect from the medical | >insurance deduction. | | | Phil | | | | When I look at Pub 560 Chapter 5 worksheet it seems the SEP is 20% of | [net Sch C] less [1/2 SE tax]?

With parens around the last two terms. :)

| I could not find a reference to medical; not sure where I got that from?

Maybe because it's the other way around, i.e., the health insurance deduction's cap is adjusted for the SEP contribution?

Dan Lanciani ddl@danlan.*comn

Vote

A

Alan 18 years ago

The contribution rate is 25%. You derive 20% from application of the deduction. Then you would also derive a net amount of 18.59% due to the SE deduction. See the Fidelity calculator.

formatting link

Vote

modififed AGI and Roth troubles

Join the Discussion

Didn't find your answer?