Part Two Of SE IRA Deduction

Qualifications to claim deductions
If you are self-employed, you may qualify for a tax deduction for contributions you make to a qualified retirement plan. You must have self-employment income to qualify. Self-employment income consists of net profits from Schedule C or Schedule F.

The deduction is the total plan contributions you can subtract from gross income on your federal income tax return. Limits apply to the amount deductible. You can avoid examinations and additional assessments by making sure you qualify for the deduction.

The self-employed retirement plan deduction may not be allowable if:
- Form 1040, Schedule SE, Section A (if applicable), Line 4, is less than the amount on Form 1040, Line 28.
- Form 1040, Schedule SE, Section B (if applicable), Line 6, is less than the amount on Form 1040, Line 28.
- Form W-2 indicates an individual is a Statutory Employee and the amount in Box 1 is less than Form 1040, Line 28.


Deduction limits for the self employed
If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment — which takes into account both of the following deductions:
- Deduction for one-half of your self-employment tax.
- Deduction for contributions to your own SEP-IRA.

Use the rate table or worksheets in chapter 5 of IRS Publication 560, “Retirement Plans for Small Business” for figuring your allowable contribution rate and tax deduction for your SEP-IRA plan contributions.


Deducting contributions
When to deduct contributions for a year depends on the tax year on which the SEP is maintained. If the SEP is maintained on a calendar year basis, you deduct the yearly contributions on your tax return for the year within which the calendar year ends. If you file your tax return and maintain the SEP using a fiscal year or short tax year, you deduct contributions made for a year on your tax return for that year.

For example, you are a fiscal year taxpayer whose tax year ends June 30. You maintain a SEP on a calendar year basis. You deduct SEP contributions made for calendar year 2008 on your tax return for your tax year ending June 30, 2009.