Changes in 2010 SE Calculation... Or Not?

[austin3515]

Did anyone esle see this Relius technical update regarding 2010 SE Calculations?

http://www.relius.net/News/TechnicalUpdates.aspx?ID=555

Included in the article is the following sentence, which seems to suggest that the rule change can be igored, but the balance of the article runs through how the calculations should be run... Anyone have any insight?

For retirement plans, NESE are the key component of “earned income" which is the basis of the compensation determination for a self-employed individual. While the statute itself is silent on the subject, the committee reports indicate that earned income should be interpreted without regard to the 2010 change.

[12AX7]

I have read this at least 10 times this morning. There seems to be too much informatioin not related to the calculation of plan comp if this does not change for 2010. Why mention software limitations as well if there is no change?

[austin3515]

But are you also puzzled by the paragraph I highlighted? I agree with your conclusions about "Why all the extra info" if there is no change required, but of course if I don't have to go through and change all my templates for this I would be quite happy..

[Bird]

I read it...once, and left it open to read again some other time. With any luck, my browser will crash and I'll lose it, and never think about it again, because I'm pretty sure that paragraph that seems to say "ignore it" is the important piece of information.

[12AX7]

For compensation over the (a)(17) limit (after all deductions), this has no effect. For comp under the limit, there is some effect, sometimes minimal *if* this change is in effect for 2010. Relius could have simply stated that for 2010, you will calculate plan comp in the same manner as 2009 (period). Does it seem that Relius is hedging a little on this?

[DMcGovern]

It is a confusing article by Sungard Relius and I think additional guidance is needed.

My understanding of the article was that for income tax purposes, self-employed individuals are allowed to deduct the SEHI (paragraph 3). Paragraphs 4 & 5 are illustrating the conflicting (or gray areas) of how this change may or may not affect the calculations for retirement plan purposes. Paragraph 4 indicates that the committee that created this new rule in the SBJA felt that for retirement plan purposes, the deduction is not considered. Paragraph 5 looks to the Code and says (or interprets) it to include this new deduction.

Their example in the article includes the deduction and appears to take the position that follows (their interpretation of) the Code.

Of course, I could be totally wrong here!

[masteff]

Looking at their example, "earned income" is actually higher in 2010 as a result (because SE tax is smaller). So depending on what type of contribution/calculation you're working with, it might actually increase how much could be put into the plan.

A few tidbits I toss in:

1) The IRS has changed the instructions for Line 3 of Schedule SE to mention deducting SEHI (they did not change the schedule itself).

2) Looking to the actual Technical Explanation of SBJA2010, it references the definition of SE earned income in Section 401©(2) (which raises the question of what exactly relies on that definition). http://www.jct.gov/publications.html?func=...7&no_html=1

[austin3515]

Anyone know if this amount is reported on the K-1, and if so, what is the code?

[masteff]

Anyone know if this amount is reported on the K-1, and if so, what is the code?

1065 K-1 Box 13 Code M http://www.irs.gov/pub/irs-pdf/i1065sk1.pdf (Edit: curious, as of right now, that's the 2009 version and not the 2010... wonder if they'll change the verbage for Code M slightly for the 2010 version.)

[Guest JPIngold]

FWIW - My tax software (Lacerte) is computing self-employed income for retirement plan contributions as it did in 2009. In other words, it is computing the SE tax deduction without regard to the SEHI deduction and using that in its computation of the income available for contribution purposes.

Example:

Schedule C = $150,000.

SE health insurance (SEHI) deduction on 1040, page 1, line 29 = $10,000

SE tax will be $16,993, based on $140,000 of net SE income after the $10,000 SEHI deduction

1/2 of that will be $8,497, which will be the deduction on page 1 of Form 1010.

However, in computing earned income for retirement plan purposes, they use what they label the "tentative" 1/2 SE tax deduction ($8,630), which is what it would have been but for the SEHI deduction on Schedule SE.

Therefore, although the numbers you would see on the 1040 would lead you to believe your earned income (before retirement plan contribution) would be $141,503 ($150,000 - $8,497), it is really $141,370 ($150,000 - $8,630).

All that said, it appears as though Relius is telling us in that one sentence (where they say earned income should be interpreted without regard to the 2010 change) what my software is and the computation is not changing. [Not sure then why they give an example as though it were to be taken into account.] However, you can't just look at Form 1040 and use the 1/2 SE tax deduction you see there for your computation as you need to "recompute" the "tentative SE tax deduction" without regard to the SEHI deduction.

Of course, this assumes Lacerte has correctly interpreted the guidance, but I find they normally do.

James

[austin3515]

http://www.relius.net/news/technicalupdates.aspx?T=P

Sungard has clarified on all of this...

[Guest JPIngold]

http://www.relius.net/news/technicalupdates.aspx?T=P

Sungard has clarified on all of this...

So they disagree with my tax software.

IRS is going to need to address this ASAP!!! If Sungard is correct, there will be a lot of incorrect tax returns out there, prepared by tax professionals who don't understand retirement plan rules. They just check the "maximize contribution" box and assume the software does it correctly.

[12AX7]

So after all this, much ado about nothing?

http://www.relius.net/News/TechnicalUpdates.aspx?ID=562