Elvira is a self-employed taxpayer who turns 42 years old at the end of the year...

Elvira is a self-employed taxpayer who turns 42 years old at the end of the year (2019). In 2019, her net Schedule C income was $130,000. This was her only source of income. This year, Elvira is considering setting up a retirement plan. What is the maximum amount Elvira may contribute to the self-employed plan in each of the following situations? (Round your intermediate calculations and final answers to the nearest whole dollar amount.) Problem 13-77 Part a a. She sets up a SEP IRA.

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Expert Solution

SEP-IRA stands for Simplified Employee Pension Individual Retirement Arrangement. Self employed people can invest in SEPs to fund their retirement. A self employed person can contribute a maximum of $56,000 in 2019 subject to a limitation of 20% of the net business income. Net business income means gross business revenue less all business expenses.

In 2019, Elvira's net business income is $130,000. The self employment tax is 15.3% of the net business income. As we can deduct 50% of the self employment tax i.e. 7.65% from AGI, hence the net deductible should be 7.65%. Alternatively we can also say that 92.35% (100% - 7.65%) of net business income is the net business income for calculating the 20% limit. In this case her Net business income = 20% of $130,000 = $26,000 which is less than the maximum limit of $56,000. Hence she can invest maximum of lower of the above two i.e. $26,000.

If she sets up a SEP IRA in 2019, she can invest upto $26,000.

ekkarill92 answered 1 year ago

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