Maximizing solo 401k contribution

[dmertz]

"Is it OK to take a $16K insurance deduction, and also put $20K into my spouse's individual (traditional) 401k in order to get a $36K deduction on schedule 1?"

No.  The sum of line 16 and line 17 is not permitted to exceed the $20,000 of net earnings.  The sum of lines 15, 16 and 17 is not permitted to exceed net profit.

The maximum possible deduction on Schedule 1 for these items would be $35,000 as follows:

Line 16: $4,000

Line 17:  $16,000

Line 20, $15,000 if you were both over age 50 in 2023 and MAGI is below $116,000, (a $7,500 traditional IRA contribution each)

[hesformes]

If you use the maximize contribution check box for you 401k in Turbo Tax, it doesn't take into account your health insurance deduction. Why it doesn't, I have no idea. You can't take total deductions that exceeds your net profit. If you take the 16k insurance deduction, that leaves only 4k for the traditional 401k contribution. It is better to take the insurance deduction than contribute the 16k to the traditional 401k because eventually you will have to pay taxes on withdrawals from the 401k whereas you will never have to pay taxes on the 16k insurance deduction.

Hopefully no corrections are required on this post, but thanks to Dmertz for the correction on my last post.

[hesformes]

I just want to double check something for my already filed 2023 tax return. I took the insurance and traditional 401k contribution deductions, which equal my total net profit. I put an additional $8k into a traditional IRA. So what you are saying is that that is not allowed unless I have other income? In fact, my wife had additional income from her employment, so I think I'm good for this year. If she stops working, does that mean the total for my wife's and my contribution to all of our traditional IRAs and 401ks can't exceed my net profit?

[dmertz · Accepted solution]

Whatever is allocated to the self-employed health insurance is also available to support IRA contributions.  Only the amounts on Schedule 1 lines 15 and 16 reduce the amount of net profit available to support IRA contributions.

[goshawk2]

@dmertz 

Huge thanks for this. Had I only known years ago. May I just check that I've got this clear?

With 28,700 in Schedule C net income for 2024, I can

1) claim my 8700 health insurance deduction

2) put the remaining 20,000 in my solo 401k

3) and still put 8000 in my traditional IRA for 2024?

If so... !!!!

[hesformes]

The total of your health insurance deduction, 401k contribution, and IRA contribution can't exceed the amount of your net profit (Line 31 of Schedule C). So in the scenario you presented, you would not be able to contribute to your IRA or you would have to contribute only 12,000 to your 401k to put the 8000 in your IRA.

[hesformes]

I just reread dmertz's response to my question from last year, making me think I may have been mistaken in my response to your post. I am in the same situation as you this year. My 401k contribution and my insurance deduction equals my net profit minus the deductible portion of my SE tax. So I also am wondering if I can contribute the amount of my insurance deduction into my IRA.

[dmertz · Accepted solution]

"The total of your health insurance deduction, 401k contribution, and IRA contribution can't exceed the amount of your net profit (Line 31 of Schedule C)."

Yes, as you have reconsidered, that statement is incorrect.  IRA contributions are personal, not business-related.  The total that cannot exceed net profit is the sum of the deductible portion of self-employment taxes, the self-employed retirement deduction and the self-employed health insurance deduction.  The amount available to support an IRA contribution is net profit minus the sum of the deductible portion of self-employment taxes and the self-employed retirement deduction.  The amount allocated to the self-employed health insurance deduction does not reduce the amount available to support an IRA contribution.

[texas_scot]

So has anyone reported a bug to Intuit, since it will correctly calculate a limitation to your self employment HID on line 13 of form 7206 and then exceed that limit when it optimizes the split between ACA subsidy and SEHID as part of the process of completing form 8962 (the IRS iterative method I believe)?

I have 38,010 profit on my schedule C.  Deductible SE taxes are $2686.  I have a Solo-401K contribution of $25,000 planned, but TT is coming up with a SEHID of $13,252.  These total to $40,938 which is almost $3K more than the profit.    

On Form 7206, it calculates a limit of $10,324, but combining the ACA premium and my dental and long term care premiums comes to  $13,252.

I am thinking I should reduce the Solo-401K contribution to $22,000.  Any thoughts?