Interaction of SE Health Deduction and Allowable Solo 401(k) contribution

Submitted by Robert Fairey on Thu, 2018-10-04 14:23

I am trying to determine if the amount for my calculation of the 2017 solo 401(k) contribution is correct.

Facts:
1. Schedule C net income is $7459.
2. I want to be able to deduct my SE health premiums of $4091 against my Schedule C income. If I use the full $7459 for the calculation of the maximum 401(k) contribution, the tax software doe not allow the SE health insurance deduction. In other words, it appears you cannot double dip and get both a 401(k) contribution and SE health insurance deduction using the same SE income.
3. Therefore, I reduced the Sch. C income by the amount of the SE health premiums to calculate the allowable 401(k) deduction to deduct the full SE health premiums .
4. The tax software still reduces the Sch. C income of $3368 by the deduction for SE tax using the SE tax on the full $7459 rather than the SE tax on the $3368 . This makes sense to me since if it were not done, there would again be the potential for a 401(k) contribution on a portion of the SE income for which there had already been the benefit of the SE tax deduction.

Am I correct ?

Alternative: If I make a Roth contribution to the solo 401(k) rather than a deductible contribution, could I deduct the full SE health premium and contribute a larger amount to the solo 401(k) since the retirement plan contribution would no longer be deductible?

A second question: Assuming I have no other earned income, can I make a solo 401(k) contribution and a nondeductible IRA contribution using the same Schedule C income?



Submitted by David Mertz on Thu, 2018-10-04 16:44

  • Health insurance premiums for yourself are not a Schedule C deduction, so your health insurance premiums cannot be used to reduce the amount of SE taxes.  Your Schedule C profit is what is shown on Schedule C line 31 without any consideration of your health insurance premiums.
  • Your deduction for solo 401(k) contributions attributable to this business plus the deductible portion of SE taxes attributable to this business plus the deduction for SE health insurance established under this business is not permitted to exceed your net profit from self-employment on Schedule C.  To get the maximum SE health insurance deduction you must limit your solo 401(k) contribution to net profit reduced by the deductible portion of SE taxes and your SE health insurance premiums.  (Things are a bit more complicated if your health insurance was obtained through the Marketplace and Premium Tax Credits are involved.) 
  • The SE health insurance deduction is an amount on which you will never pay taxes while the deduction for SE retirement contributions represents an amount on which taxes are only deferred, so it may be advantageous to take the maximum SE health insurance deduction by limiting your deductible solo 401(k) contributions.
  • Yes, I believe that you can make the remaining amount of your solo 401(k) contribution as a Roth contribution since it does not add to the amount of your SE retirement deduction on Form 1040 line 28.
  • The amount that you can contribute to an IRA is limited to net profit reduced by the deductible portion of SE taxes and the deduction for your self-employed retirement contributions.  By limiting your SE retirement deduction to the maximum amount that would permit you to receive the full SE health insurance deduction you would be able to make an IRA contribution up to an amount equal to your SE health insurance deduction.

Submitted by Robert Fairey on Thu, 2018-10-04 17:16

Dmx,Thanks for the response. Yes, I realize SE health deduction is not a Sch. C deduction.  Your third point is the reason I want to maximize the SE health deduction first, and then maximize the solo 401(k) contribution next. Apparently, I have 3 options with the net profit reduced by the deductible portion of SE taxes and the deduction for your self-employed retirement contributions: (1) Roth 401(k) contribution;  (2) IRA contribution; or (3) do not make any additional retirement plan contributions on the the net profit reduced by the deductible portion of SE taxes and the deduction for your self-employed retirement contributions. Assume I cannot do both (1) and (2) with the leftover net profit, even if the IRA contribution is a nondeductible contribution that I later use for a backdoor Roth-correct?Another question: Are the setup fees and annual fees for a solo 401(k) deductible on Schedule C? Thanks.

Submitted by Robert Fairey on Thu, 2018-10-04 17:23

I should clarify that the question about whether the setup and annual fees are deductible on Schedule C relates to fees for preparing plan documents for a non-prototype plan, making sure the plan documents are updated, assistance with preparation of Form 5500-EZ, etc.  I am not referring to investment fees, account management fees, etc.

Submitted by David Mertz on Thu, 2018-10-04 17:53

  • Actually, I think you *can* do both (1) and (2) with the amount left over after subtracting only the amounts on Form 1040 lines 27 and 28.  If you make the maximum deductible elective deferral while still permitting the entire SE health deduction, you should be able to contribute an amount equal to the SE health deduction to the Roth 401(k) *and* the same amount to an IRA.  That’s what my tax software shows.
  • I’m not familiar with dealing with plan startup costs other than that you cannot claim a tax credit for plan startup costs for which you claim a deduction.

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