topic solo 401k contributions in Deductions & credits

solo 401k contributions

Eric34 — Sun, 05 Apr 2020 00:37:02 GMT

When I change my solo 401k contribution from 16,500 to 16,600, my calculated $4,000 refund changes to a $3,000 tax owed. Any ideas why? I am a sole proprietor, and I have not yet decided how much my contribution should be. I also receive a tax credit for ACA health insurance.

Re: solo 401k contributions

DaveF1006 — Sun, 05 Apr 2020 19:30:53 GMT

it may be because of your income. IRS.gov stipulates you can make elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual). What is the amount of your earned income for the year and does it exceed $16,500?

Re: solo 401k contributions

Eric34 — Tue, 07 Apr 2020 16:30:15 GMT

Thanks for your thoughts. Unfortunately, I don't think that's it. My earned income is about 25,000. In fact, when I let Turbotax calculate my maximum 401k contribution it comes up with a little over $23,000. I had to play around to find the $16,500 threshold where it drops of a cliff.

Re: solo 401k contributions

ThomasM125 — Tue, 07 Apr 2020 19:43:09 GMT

That doesn't make any sense. I suggest you look at your return before the change and then after it to see what numbers are different. It is such a large change in tax that it should be pretty obvious what is changing.

You can view your form 1040 and schedule 1 to 3 in TurboTax while logged into our program as follows:

1. Find the "Tax Tools" option on your left menu bar and click on it

2. Click on "Tools"

3. Click on "View Tax Summary"

4. On your left menu bar find the "Preview my 1040" option and click on it

Re: solo 401k contributions

Eric34 — Thu, 09 Apr 2020 19:33:51 GMT

Thanks, that helps. It looks like TurboTax does not allow the ACA credit to exceed taxable income. As as I increase the 401k contribution by the last $500, my taxable income goes down by just enough that it becomes less than the ACA premium credit. At that point TurboTax eliminates the credit. At the same time, it now deducts health insurance premiums as a business expense, but that doesn't change my tax, which is already zero. The net effect is the loss of the ACA credit and a remaining tax bill equal to my self-employment tax. It would surprise me it that is the correct interpretation of the law, but I don't know.

Re: solo 401k contributions

BillM223 — Thu, 09 Apr 2020 20:26:34 GMT

"It would surprise me it that is the correct interpretation of the law, but I don't know."

The answer to your question is buried in the convoluted worksheets W and X on Pub 974. "Worksheet W. Figuring the Limit on the Self-Employed Health Insurance Deduction for Specified Premiums" is found starting on page 59.

"Worksheet X. Figuring Household Income and the Repayment Limitation" starts on page 60.

If you look closely (like on line 9 on Worksheet W and line 4 on Worksheet X), the contribution to your 401(k) plan appears here. In the pages that follow, there are additional worksheets that show the additional interaction of the Premium Tax Credit and the self-employed health insurance deduction, which results in determining what the amount of Premium Tax Credit you are allowed to take.

In short, it is plausible (but you would have to work through all these worksheets) that the increase in the contribution to the 401(k) could eventually cut off your Premium Tax Credit.

I wish I could point to a simple explanation, but this is what we have.

Re: solo 401k contributions

JM40 — Thu, 09 Apr 2020 21:24:26 GMT

How do I enter the reduction I am entitled to on the tax form? How do I enter the reduction for the alloted

Social Security payment on the form?

Re: solo 401k contributions

ThomasM125 — Thu, 09 Apr 2020 21:55:12 GMT

The premium tax credit depends in large part on your income. The self-employed health insurance deduction reduces your income, which in turns increases your premium tax credit. The problem is that you are not allowed to take the health insurance deduction to the extent that it increases your premium tax credit.

There is a complicated series of worksheets you have to use to determine what amount of your premium tax credit and self-employed insurance deduction are allowed.

If you use the desktop version of TurboTax you can see the worksheets and compare them with the results you can calculate manually per the instructions to form 1040 if you want to verify the accuracy of the calculations in TurboTax.

Here is a link to the instructions to form 1040:

https://www.irs.gov/pub/irs-pdf/i1040gi.pdf