I made excess 2020 SEP contributions. I understand I can get them back, however they will be coded as a 2021 income even though i have already paid tax on the this income that i funded the sep with. How can i prevent that excess withdrawal from being taxed as 2021 wages?
You will not be taxed again in 2021 if you remove the Excess SEP Contribution in 2020.
You will receive a 2021 Form 1099-R with Codes to report it as 'removal of excess contribution', so it is not taxable, only reportable, with the exception of taxable Earnings.
Click this link for more info on Excess SEP Contribution.
Hello,
I am in the process of removing my excess contribution, and it should be done before the filing due date of May 17th. Can you please let me know should I file the 2020 tax return with or without the excess contribution amount? Previously a TurboTax expert advised me to file it without the excess, but my brokers said that I need to file the return with the excess amount since the 1099-R won't be ready until January 2022, and that I should consult a tax expert to make sure I file the return correctly.
Thank you so much!
You will file the return indicating that you did remove the excess amount prior to the filing deadline of the tax return. It's okay that you don't have the 1099-R.
You can report any earnings next year using the 1099-R, since it is when you will have received those earnings.
In TurboTax, when the program detects the excess contribution (after you enter the amount contributed) it will ask you if you removed it prior to the filing deadline and adjust the return for you accordingly.
The end result is you file 2020 tax return without reporting an excess contribution, but you will report any earnings as income on your 2021 tax return.
@SusanY1Thank you so much for the information, and for confirming the procedure regarding how to handle the excess SEP contribution.