SEP IRA Contribution Increases AGI and Taxes Due

It is possible that you have something like a qualified business income (QBI) deduction and the contribution to the SEP retirement plan is reducing that deduction which may increase your taxable income even after you deduct the SEP contribution. You will see the QBI deduction on line 13 of your form 1040. 

 

Also, you may be over contributing to your retirment plans which would create a penalty. You would see that on line 8 of form 1040, schedule 2.

 

I suggest you look at your form 1040 both before the SEP contribution and after to see what is changing. 

 

You can view your form 1040 and schedules 1 to 3 while working in the online version of TurboTax by following these steps:

 

1. Click on Tax Tools in the left menu bar
2. Click on Tools
3. Look under Other Helpful links….
4. Choose View Tax Summary
5. Look in the left menu bar and choose Preview my 1040
6. Scroll down the page to see form 1040 and schedules 1 to 3

 

 

 

 

Thank you! I do have a QBI so maybe that's it. I checked Schedule 2 and Line 8 is empty. I did have an excess contribution on my Traditional IRA but Turbotax never notified me of an over-contribution for the SEP. I assumed they would be separate.  Is there anything I could do? I'm being taxed at about 40% on my SEP contribution!

It would be helpful to have a TurboTax ".tax2022" file that is experiencing this issue.

 

You can send us a “diagnostic” file that has your “numbers” but not your personal information. If you would like to do this, here are the instructions: 

 

If using Turbo Tax software:

 

At the top menu in the black line at the top of the page go to Online. 

1. From the menu, select Send Tax File to Agent. 
2. You will see a message explaining what the diagnostic copy is. Click Send and then you will get a Token number. 
3. Reply to this thread with your Token number. This will allow us to open a copy of your return without seeing any personal information.  

If using online:

 

1. Click on Tax Tools in the left menu bar
2. Click on Tools>share my file with agent
3. press ok and you should get a token number

We will then be able to see exactly what you are seeing and we can determine what exactly is going on in your return and provide you with a resolution.

Thank you Dave. I'm looking at my Schedule 1 Line 16 (under Adjustments to Income) and it does show the SEP contribution there. The total adjustments to income also matches 1040 Line 10. Does that mean the SEP contribution has been subtracted from my taxable income? 

Yes, the adjustments to income, which include your Sep contribution, reduce income reported on Line 9 on the 1040. As a result your Adjusted Gross Income reported on line 11 is your income minus the adjustments in line 10. As a result, Line 11 is now your adjusted gross income.(AGI). The Sep contribution has been successfully subtracted from your Gross income.

 

@DarkMouth 

Appreciate the help!

I went back and looked at it again and found something interesting. When the SEP contribution is not included, I get the full $6000 Traditional IRA deduction and when the SEP contribution is added, I no longer get the $6000 IRA deduction and only get the $2000 SEP deduction, which increases my income and thus the taxes that I owe. I opened a SEP because I thought I could take both the Traditional and SEP deductions. Is that not the case? Do I have to chose which one I want to take? Any thoughts?

Thank you for your help!

 

If you make the SEP contributions then this is considered a retirement plan at work and your traditional IRA deduction may be limited if you or your spouse is covered by a retirement plan at work and your income exceeds certain levels. Please see IRA deduction limits for details.

 

 

For 2022 the total contributions you make each year to all of your traditional IRAs  and Roth IRAs can't be more than:

• $6,000 ($7,000 if you're age 50 or older), or
• If less, your taxable compensation for the year

 

If you are self-employed, taxable compensation is the net earnings from your trade or business (line 3 Schedule 1) reduced by the total of:

• The deduction for contributions made on your behalf to retirement plans (line 16 Schedule 1), and
• The deduction allowed for the deductible part of your self-employment taxes (line 15 schedule1).

 

@DarkMouth 

Ok so would it make sense to rollover the Traditional IRA into the SEP?

I can't really advise on what you should do, but I can provide some useful information on SEP's and Traditional IRA's.

 

Retirement plans can be rolled over and consolidated into a SEP. This includes traditional IRAs, 401(k) plans, money purchase plans, profit sharing plans, defined benefit plans, 403(b) plans and Rollover IRAs.

Some of the advantages of a SEP account include a reduction in taxable income, tax-deferred compounding, high contribution limits (larger than other retirement plans), easy to administer, contributions tax deductible, and a practical way to save for retirement.

 

A disadvantage of a SEP is that there are No catch-up contributions if you're over the age of 50, there are no catch-up contributions like you see with IRAs and 401(k)s.

Traditional IRAs

• Retirement plan at work: Your deduction may be limited if you (or your spouse, if you are married) are covered by a retirement plan at work and your income exceeds certain levels. This is important to keep in mind as it limits your Traditional IRA deduction.
• For 2022, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI i
• More than $109,000 but less than $129,000 for a married couple filing a joint return or a qualifying widow(er),
• More than $68,000 but less than $78,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return.

Modified AGI limit for certain married individuals increased.

If you are married and your spouse is covered by a retirement plan at work and you aren’t, and you live with your spouse or file a joint return, your deduction is phased out if your modified AGI is more than $204,000 (up from $198,000 for 2021) but less than $214,000 (up from $208,000 for 2021). If your modified AGI is $214,000 or more, you can’t take a deduction for contributions to a traditional IRA.

For SEPs you can contribute up to 25% of the employee's total compensation or a maximum of $61,000 for the 2022 tax year or $66,000 for the 2023 tax year, whichever is less. If you're self-employed, your contributions are generally limited to 20% of your net income.

The IRA contribution limits for 2022 are $6,000 for those under age 50. Those 50 or older can contribute an extra $1,000 through a "catch-up contribution," for a total of $7,000. You can make 2022 IRA contributions until the un-extended federal tax deadline (for income earned in 2022, which is April 18, 2023).

 

Click here for SEP Contribution Limits

 

Click here for Pub 560 Retirement Plans for small businesses.

 

 

 

 

I appreciate the information!