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Filing 1040ez

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Filing 1040ez

Filing 1040ez 35. Filing 1040ez   Education Credits Table of Contents Introduction Useful Items - You may want to see: Who Can Claim an Education Credit Qualified Education ExpensesNo Double Benefit Allowed Adjustments to Qualified Education Expenses Introduction For 2013, there are two tax credits available to persons who pay expenses for higher (postsecondary) education. Filing 1040ez They are: The American opportunity credit, and The lifetime learning credit. Filing 1040ez The chapter will present an overview of these education credits. Filing 1040ez To get the detailed information you will need to claim either of the credits, and for examples illustrating that information, see chapters 2 and 3 of Publication 970. Filing 1040ez Can you claim more than one education credit this year?   For each student, you can choose for any year only one of the credits. Filing 1040ez For example, if you choose to take the American opportunity credit for a child on your 2013 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2013. Filing 1040ez   If you are eligible to claim the American opportunity credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both. Filing 1040ez   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity and the lifetime learning credits on a per-student, per-year basis. Filing 1040ez This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Filing 1040ez Table 35-1. Filing 1040ez Comparison of Education Credits Caution. Filing 1040ez You can claim both the American opportunity credit and the lifetime learning credit on the same return—but not for the same student. Filing 1040ez   American Opportunity Credit Lifetime Learning Credit Maximum credit Up to $2,500 credit per eligible student Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly;  $90,000 if single, head of household, or qualifying widow(er) $127,000 if married filing jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable Credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) the Hope credit was claimed) Available for an unlimited number of years Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period beginning during the tax year Available for one or more courses Felony drug conviction At the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Felony drug convictions do not make the student ineligible Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Differences between the American opportunity and lifetime learning credits. Filing 1040ez   There are several differences between these two credits. Filing 1040ez These differences are summarized in Table 35-1, later. Filing 1040ez Useful Items - You may want to see: Publication 970 Tax Benefits for Education Form (and Instructions) 8863 Education Credits (American Opportunity and Lifetime Learning Credits) Who Can Claim an Education Credit You may be able to claim an education credit if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. Filing 1040ez The credits are based on the amount of qualified education expenses paid for the student in 2013 for academic periods beginning in 2013 and in the first 3 months of 2014. Filing 1040ez For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 education credit(s). Filing 1040ez Academic period. Filing 1040ez   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Filing 1040ez In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Filing 1040ez Eligible educational institution. Filing 1040ez   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Filing 1040ez S. Filing 1040ez Department of Education. Filing 1040ez It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Filing 1040ez The educational institution should be able to tell you if it is an eligible educational institution. Filing 1040ez   Certain educational institutions located outside the United States also participate in the U. Filing 1040ez S. Filing 1040ez Department of Education's Federal Student Aid (FSA) programs. Filing 1040ez Who can claim a dependent's expenses. Filing 1040ez   If an exemption is allowed as a deduction for any person who claims the student as a dependent, all qualified education expenses of the student are treated as having been paid by that person. Filing 1040ez Therefore, only that person can claim an education credit for the student. Filing 1040ez If a student is not claimed as a dependent on another person's tax return, only the student can claim a credit. Filing 1040ez Expenses paid by a third party. Filing 1040ez   Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. Filing 1040ez However, qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. Filing 1040ez Therefore, you are treated as having paid expenses that were paid by the third party. Filing 1040ez For more information and an example see Who Can Claim a Dependent's Expenses in Pub. Filing 1040ez 970, chapter 2 or 3. Filing 1040ez Who cannot claim a credit. Filing 1040ez   You cannot take an education credit if any of the following apply. Filing 1040ez You are claimed as a dependent on another person's tax return, such as your parent's return. Filing 1040ez Your filing status is married filing separately. Filing 1040ez You (or your spouse) were a nonresident alien for any part of 2013 and did not elect to be treated as a resident alien for tax purposes. Filing 1040ez Your MAGI is one of the following. Filing 1040ez American opportunity credit: $180,000 or more if married filing jointly, or $90,000 or more if single, head of household, or qualifying widow(er). Filing 1040ez Lifetime learning credit: $127,000 or more if married filing jointly, or $63,000 or more if single, head of household, or qualifying widow(er) . Filing 1040ez   Generally, your MAGI is the amount on your Form 1040, line 38, or Form 1040A, line 22. Filing 1040ez However, if you are filing Form 2555, Form 2555–EZ, or Form 4563, or are excluding income from Puerto RIco, add to the amount on your Form 1040, line 38, or Form 1040A, line 22, the amount of income you excluded. Filing 1040ez For details, see Pub. Filing 1040ez 970. Filing 1040ez    Figure 35-A may be helpful in determining if you can claim an education credit on your tax return. Filing 1040ez The American opportunity credit will always be greater than or equal to the lifetime learning credit for any student who is eligible for both credits. Filing 1040ez However, if any of the conditions for the American opportunity credit, listed in Table 35-1 earlier, are not met for any student, you cannot take the American opportunity credit for that student. Filing 1040ez You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. Filing 1040ez See Pub. Filing 1040ez 970 for information on other education benefits. Filing 1040ez Qualified Education Expenses Generally, qualified education expenses are amounts paid in 2013 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution. Filing 1040ez It does not matter whether the expenses were paid in cash, by check, by credit or debit card, or with borrowed funds. Filing 1040ez For course-related books, supplies, and equipment, only certain expenses qualify. Filing 1040ez American opportunity credit: Qualified education expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. Filing 1040ez Lifetime learning credit: Qualified education expenses include amounts for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance. Filing 1040ez Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. Filing 1040ez However, fees for personal expenses (described below) are never qualified education expenses. Filing 1040ez Qualified education expenses for either credit do not include amounts paid for: Personal expenses. Filing 1040ez This means room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. Filing 1040ez Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills. Filing 1040ez You should receive Form 1098–T, Tuition Statement, from the institution reporting either payments received in 2013 (box 1) or amounts billed in 2013 (box 2). Filing 1040ez However, the amount in box 1 or 2 of Form 1098–T may be different from the amount you paid (or are treated as having paid). Filing 1040ez In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2013, reduced as necessary, as described in Adjustments to Qualified Education Expenses , later. Filing 1040ez Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. Filing 1040ez Qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. Filing 1040ez If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits. Filing 1040ez Qualified education expenses for any academic period must be reduced by any tax-free educational assistance allocable to that academic period. Filing 1040ez See Adjustments to Qualified Education Expenses, later. Filing 1040ez Prepaid Expenses. Filing 1040ez   Qualified education expenses paid in 2013 for an academic period that begins in the first 3 months of 2014 can be used in figuring an education credit for 2013 only. Filing 1040ez See Academic period , earlier. Filing 1040ez For example, if you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Filing 1040ez    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Filing 1040ez Paid with borrowed funds. Filing 1040ez   You can claim an education credit for qualified education expenses paid with the proceeds of a loan. Filing 1040ez Use the expenses to figure the credit for the year in which the expenses are paid, not the year in which the loan is repaid. Filing 1040ez Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. Filing 1040ez Student withdraws from class(es). Filing 1040ez   You can claim an education credit for qualified education expenses not refunded when a student withdraws. Filing 1040ez No Double Benefit Allowed You cannot do any of the following. Filing 1040ez Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an education credit based on those same expenses. Filing 1040ez Claim more than one education credit based on the same qualified education expenses. Filing 1040ez Claim an education credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Filing 1040ez Claim an education credit based on qualified education expenses paid with educational assistance, such as a tax-free scholarship, grant, or employer-provided educational assistance. Filing 1040ez See Adjustments to Qualified Education Expenses, next. Filing 1040ez Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid in 2013 by or on behalf of that student under the following rules. Filing 1040ez The result is the amount of adjusted qualified education expenses for each student. Filing 1040ez Tax-free educational assistance. Filing 1040ez   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Filing 1040ez See Academic period , earlier. Filing 1040ez      Tax-free educational assistance includes:    Tax-free parts of scholarships and fellowships (see chapter 12 of this publication and chapter 1 of Pub. Filing 1040ez 970), The tax-free part of Pell grants (see chapter 1 of Pub. Filing 1040ez 970), The tax-free part of employer-provided educational assistance (see Pub. Filing 1040ez 970), Veterans' educational assistance (see chapter 1 of Pub. Filing 1040ez 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Filing 1040ez Generally, any scholarship or fellowship is treated as tax-free educational assistance. Filing 1040ez However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent the student includes it in gross income (if the student is required to file a tax return) for the year the scholarship or fellowship is received and either: The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. Filing 1040ez 970, chapter 1; or The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. Filing 1040ez 970, chapter 1. Filing 1040ez You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year received. Filing 1040ez For details, see Adjustments of Qualified Education Expenses, in chapters 2 and 3 of Pub. Filing 1040ez 970. Filing 1040ez Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Filing 1040ez This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Filing 1040ez If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. Filing 1040ez If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. Filing 1040ez Refunds. Filing 1040ez   A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. Filing 1040ez Some tax-free educational assistance received after 2013 may be treated as a refund. Filing 1040ez See Tax-free educational assistance, earlier. Filing 1040ez Refunds received in 2013. Filing 1040ez   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses paid in 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Filing 1040ez Refunds received after 2013 but before your income tax return is filed. Filing 1040ez   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is received before you file your 2013 income tax return, reduce the amount of qualified education expenses for 2013 by the amount of the refund. Filing 1040ez Refunds received after 2013 and after your income tax return is filed. Filing 1040ez   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is received after you file your 2013 income tax return, you may need to repay some or all of the credit that you claimed. Filing 1040ez See Credit recapture, next. Filing 1040ez Credit recapture. Filing 1040ez    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Filing 1040ez You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Filing 1040ez You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Filing 1040ez Include that amount as an additional tax for the year the refund or tax-free assistance was received. Filing 1040ez Example. Filing 1040ez    You paid $8,000 tuition and fees in December 2013 for your child's Spring semester beginning in January 2014. Filing 1040ez You filed your 2013 tax return on February 3, 2014, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid x . Filing 1040ez 20). Filing 1040ez You claimed no other tax credits. Filing 1040ez After you filed your return, your child withdrew from two courses and you received a refund of $1,400. Filing 1040ez You must refigure your 2013 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). Filing 1040ez The refigured credit is $1,320 and your tax liability increased by $280. Filing 1040ez You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2014 income tax return. Filing 1040ez See the instructions for your 2014 income tax return to determine where to include this tax. Filing 1040ez If you also pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Filing 1040ez Amounts that do not reduce qualified education expenses. Filing 1040ez   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Filing 1040ez   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Filing 1040ez The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Chapter 1 of Pub. Filing 1040ez 970. Filing 1040ez The use of the money is not restricted. Filing 1040ez   For examples, see chapter 2 in Pub. Filing 1040ez 970. Filing 1040ez Figure 35-A. Filing 1040ez Can You Claim an Education Credit for 2013? This image is too large to be displayed in the current screen. Filing 1040ez Please click the link to view the image. Filing 1040ez Figure 35-A. Filing 1040ez Can You Claim an Education Credit for 2013? Prev  Up  Next   Home   More Online Publications
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The Filing 1040ez

Filing 1040ez 2. Filing 1040ez   Simplified Employee Pensions (SEPs) Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Setting Up a SEPWhen not to use Form 5305-SEP. Filing 1040ez How Much Can I Contribute?Contribution Limits Deducting ContributionsDeduction Limit for Contributions for Participants Deduction Limit for Self-Employed Individuals Carryover of Excess SEP Contributions When To Deduct Contributions Where To Deduct Contributions Salary Reduction Simplified Employee Pensions (SARSEPs)SARSEP ADP test. Filing 1040ez Deferral percentage. Filing 1040ez Employee compensation. Filing 1040ez Compensation of self-employed individuals. Filing 1040ez Choice not to treat deferrals as compensation. Filing 1040ez Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Filing 1040ez Reporting and Disclosure Requirements Topics - This chapter discusses: Setting up a SEP How much can I contribute Deducting contributions Salary reduction simplified employee pensions (SARSEPs) Distributions (withdrawals) Additional taxes Reporting and disclosure requirements Useful Items - You may want to see: Publication 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4285 SEP Checklist 4286 SARSEP Checklist 4333 SEP Retirement Plans for Small Businesses 4336 SARSEP for Small Businesses 4407 SARSEP—Key Issues and Assistance Forms (and Instructions) W-2 Wage and Tax Statement 1040 U. Filing 1040ez S. Filing 1040ez Individual Income Tax Return 5305-SEP Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 5305A-SEP Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A SEP is a written plan that allows you to make contributions toward your own retirement and your employees' retirement without getting involved in a more complex qualified plan. Filing 1040ez Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Filing 1040ez A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Filing 1040ez SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Filing 1040ez A SEP-IRA may have to be set up for a leased employee (defined in chapter 1), but does not need to be set up for excludable employees (defined later). Filing 1040ez Eligible employee. Filing 1040ez   An eligible employee is an individual who meets all the following requirements. Filing 1040ez Has reached age 21. Filing 1040ez Has worked for you in at least 3 of the last 5 years. Filing 1040ez Has received at least $550 in compensation from you in 2013. Filing 1040ez This amount remains the same in 2014. Filing 1040ez    You can use less restrictive participation requirements than those listed, but not more restrictive ones. Filing 1040ez Excludable employees. Filing 1040ez   The following employees can be excluded from coverage under a SEP. Filing 1040ez Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Filing 1040ez Nonresident alien employees who have received no U. Filing 1040ez S. Filing 1040ez source wages, salaries, or other personal services compensation from you. Filing 1040ez For more information about nonresident aliens, see Publication 519, U. Filing 1040ez S. Filing 1040ez Tax Guide for Aliens. Filing 1040ez Setting Up a SEP There are three basic steps in setting up a SEP. Filing 1040ez You must execute a formal written agreement to provide benefits to all eligible employees. Filing 1040ez You must give each eligible employee certain information about the SEP. Filing 1040ez A SEP-IRA must be set up by or for each eligible employee. Filing 1040ez Many financial institutions will help you set up a SEP. Filing 1040ez Formal written agreement. Filing 1040ez   You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Filing 1040ez You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Filing 1040ez However, see When not to use Form 5305-SEP, below. Filing 1040ez   If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Filing 1040ez Keep the original form. Filing 1040ez Do not file it with the IRS. Filing 1040ez Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Filing 1040ez See the Form 5305-SEP instructions for details. Filing 1040ez If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Filing 1040ez When not to use Form 5305-SEP. Filing 1040ez   You cannot use Form 5305-SEP if any of the following apply. Filing 1040ez You currently maintain any other qualified retirement plan other than another SEP. Filing 1040ez You have any eligible employees for whom IRAs have not been set up. Filing 1040ez You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Filing 1040ez You are a member of any of the following unless all eligible employees of all the members of these groups, trades, or businesses participate under the SEP. Filing 1040ez An affiliated service group described in section 414(m). Filing 1040ez A controlled group of corporations described in section 414(b). Filing 1040ez Trades or businesses under common control described in section 414(c). Filing 1040ez You do not pay the cost of the SEP contributions. Filing 1040ez Information you must give to employees. Filing 1040ez   You must give each eligible employee a copy of Form 5305-SEP, its instructions, and the other information listed in the Form 5305-SEP instructions. Filing 1040ez An IRS model SEP is not considered adopted until you give each employee this information. Filing 1040ez Setting up the employee's SEP-IRA. Filing 1040ez   A SEP-IRA must be set up by or for each eligible employee. Filing 1040ez SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Filing 1040ez You send SEP contributions to the financial institution where the SEP-IRA is maintained. Filing 1040ez Deadline for setting up a SEP. Filing 1040ez   You can set up a SEP for any year as late as the due date (including extensions) of your income tax return for that year. Filing 1040ez Credit for startup costs. Filing 1040ez   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SEP that first became effective in 2013. Filing 1040ez For more information, see Credit for startup costs under Reminders, earlier. Filing 1040ez How Much Can I Contribute? The SEP rules permit you to contribute a limited amount of money each year to each employee's SEP-IRA. Filing 1040ez If you are self-employed, you can contribute to your own SEP-IRA. Filing 1040ez Contributions must be in the form of money (cash, check, or money order). Filing 1040ez You cannot contribute property. Filing 1040ez However, participants may be able to transfer or roll over certain property from one retirement plan to another. Filing 1040ez See Publication 590 for more information about rollovers. Filing 1040ez You do not have to make contributions every year. Filing 1040ez But if you make contributions, they must be based on a written allocation formula and must not discriminate in favor of highly compensated employees (defined in chapter 1). Filing 1040ez When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, including employees who die or terminate employment before the contributions are made. Filing 1040ez Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Filing 1040ez A SEP-IRA cannot be a Roth IRA. Filing 1040ez Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Filing 1040ez Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Filing 1040ez If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Filing 1040ez Participants age 70½ or over must take required minimum distributions. Filing 1040ez Time limit for making contributions. Filing 1040ez   To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Filing 1040ez Contribution Limits Contributions you make for 2013 to a common-law employee's SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000. Filing 1040ez Compensation generally does not include your contributions to the SEP. Filing 1040ez The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Filing 1040ez Example. Filing 1040ez Your employee, Mary Plant, earned $21,000 for 2013. Filing 1040ez The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Filing 1040ez Contributions for yourself. Filing 1040ez   The annual limits on your contributions to a common-law employee's SEP-IRA also apply to contributions you make to your own SEP-IRA. Filing 1040ez However, special rules apply when figuring your maximum deductible contribution. Filing 1040ez See Deduction Limit for Self-Employed Individuals , later. Filing 1040ez Annual compensation limit. Filing 1040ez   You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Filing 1040ez However, $51,000 is the maximum contribution for an eligible employee. Filing 1040ez These limits are $260,000 and $52,000, respectively, in 2014. Filing 1040ez Example. Filing 1040ez Your employee, Susan Green, earned $210,000 for 2013. Filing 1040ez Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Filing 1040ez More than one plan. Filing 1040ez   If you contribute to a defined contribution plan (defined in chapter 4), annual additions to an account are limited to the lesser of $51,000 or 100% of the participant's compensation. Filing 1040ez When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Filing 1040ez Because a SEP is considered a defined contribution plan for this limit, your contributions to a SEP must be added to your contributions to other defined contribution plans you maintain. Filing 1040ez Tax treatment of excess contributions. Filing 1040ez   Excess contributions are your contributions to an employee's SEP-IRA (or to your own SEP-IRA) for 2013 that exceed the lesser of the following amounts. Filing 1040ez 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Filing 1040ez $51,000. Filing 1040ez Excess contributions are included in the employee's income for the year and are treated as contributions by the employee to his or her SEP-IRA. Filing 1040ez For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Filing 1040ez Reporting on Form W-2. Filing 1040ez   Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Filing 1040ez Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Filing 1040ez If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Filing 1040ez Deduction Limit for Contributions for Participants The most you can deduct for your contributions to you or your employee's SEP-IRA is the lesser of the following amounts. Filing 1040ez Your contributions (including any excess contributions carryover). Filing 1040ez 25% of the compensation (limited to $255,000 per participant) paid to the participants during 2013 from the business that has the plan, not to exceed $51,000 per participant. Filing 1040ez In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Filing 1040ez Deduction Limit for Self-Employed Individuals If you contribute to your own SEP-IRA, you must make a special computation to figure your maximum deduction for these contributions. Filing 1040ez When figuring the deduction for contributions made to your own SEP-IRA, compensation is your net earnings from self-employment (defined in chapter 1), which takes into account both the following deductions. Filing 1040ez The deduction for the deductible part of your self-employment tax. Filing 1040ez The deduction for contributions to your own SEP-IRA. Filing 1040ez The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Filing 1040ez For this reason, you determine the deduction for contributions to your own SEP-IRA indirectly by reducing the contribution rate called for in your plan. Filing 1040ez To do this, use the Rate Table for Self-Employed or the Rate Worksheet for Self-Employed, whichever is appropriate for your plan's contribution rate, in chapter 5. Filing 1040ez Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Filing 1040ez Carryover of Excess SEP Contributions If you made SEP contributions that are more than the deduction limit (nondeductible contributions), you can carry over and deduct the difference in later years. Filing 1040ez However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Filing 1040ez If you also contributed to a defined benefit plan or defined contribution plan, see Carryover of Excess Contributions under Employer Deduction in chapter 4 for the carryover limit. Filing 1040ez Excise tax. Filing 1040ez   If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Filing 1040ez For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Filing 1040ez When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Filing 1040ez 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. Filing 1040ez 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. Filing 1040ez Example. Filing 1040ez You are a fiscal year taxpayer whose tax year ends June 30. Filing 1040ez You maintain a SEP on a calendar year basis. Filing 1040ez You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Filing 1040ez Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Filing 1040ez For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040), Profit or Loss From Farming; partnerships deduct them on Form 1065, U. Filing 1040ez S. Filing 1040ez Return of Partnership Income; and corporations deduct them on Form 1120, U. Filing 1040ez S. Filing 1040ez Corporation Income Tax Return, or Form 1120S, U. Filing 1040ez S. Filing 1040ez Income Tax Return for an S Corporation. Filing 1040ez Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Filing 1040ez (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Filing 1040ez , you receive from the partnership. Filing 1040ez ) Remember that sole proprietors and partners can't deduct as a business expense contributions made to a SEP for themselves, only those made for their common-law employees. Filing 1040ez Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Filing 1040ez (See the Caution, next. Filing 1040ez ) Under a SARSEP, your employees can choose to have you contribute part of their pay to their SEP-IRAs rather than receive it in cash. Filing 1040ez This contribution is called an “elective deferral” because employees choose (elect) to set aside the money, and they defer the tax on the money until it is distributed to them. Filing 1040ez You are not allowed to set up a SARSEP after 1996. Filing 1040ez However, participants (including employees hired after 1996) in a SARSEP set up before 1997 can continue to have you contribute part of their pay to the plan. Filing 1040ez If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Filing 1040ez Who can have a SARSEP?   A SARSEP set up before 1997 is available to you and your eligible employees only if all the following requirements are met. Filing 1040ez At least 50% of your employees eligible to participate choose to make elective deferrals. Filing 1040ez You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Filing 1040ez The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Filing 1040ez SARSEP ADP test. Filing 1040ez   Under the SARSEP ADP test, the amount deferred each year by each eligible highly compensated employee as a percentage of pay (the deferral percentage) cannot be more than 125% of the average deferral percentage (ADP) of all non-highly compensated employees eligible to participate. Filing 1040ez A highly compensated employee is defined in chapter 1. Filing 1040ez Deferral percentage. Filing 1040ez   The deferral percentage for an employee for a year is figured as follows. Filing 1040ez   The elective employer contributions (excluding certain catch-up contributions)  paid to the SEP for the employee for the year     The employee's compensation (limited to $255,000 in 2013)   The instructions for Form 5305A-SEP have a worksheet you can use to determine whether the elective deferrals of your highly compensated employees meet the SARSEP ADP test. Filing 1040ez Employee compensation. Filing 1040ez   For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Filing 1040ez Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Filing 1040ez See Compensation in chapter 1. Filing 1040ez Elective deferrals under the SARSEP are included in figuring your employees' deferral percentage even though they are not included in the income of your employees for income tax purposes. Filing 1040ez Compensation of self-employed individuals. Filing 1040ez   If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Filing 1040ez   Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Filing 1040ez Choice not to treat deferrals as compensation. Filing 1040ez   You can choose not to treat elective deferrals (and other amounts deferred in certain employee benefit plans) for a year as compensation under your SARSEP. Filing 1040ez Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Filing 1040ez 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Filing 1040ez $17,500. Filing 1040ez The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Filing 1040ez Cash or deferred arrangement (section 401(k) plan). Filing 1040ez Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Filing 1040ez SIMPLE IRA plan. Filing 1040ez In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Filing 1040ez Catch-up contributions. Filing 1040ez   A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Filing 1040ez The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Filing 1040ez Elective deferrals are not treated as catch-up contributions for 2013 until they exceed the elective deferral limit (the lesser of 25% of compensation or $17,500), the SARSEP ADP test limit discussed earlier, or the plan limit (if any). Filing 1040ez However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Filing 1040ez The catch-up contribution limit. Filing 1040ez The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Filing 1040ez   Catch-up contributions are not subject to the elective deferral limit (the lesser of 25% of compensation or $17,500 in 2013 and in 2014). Filing 1040ez Overall limit on SEP contributions. Filing 1040ez   If you also make nonelective contributions to a SEP-IRA, the total of the nonelective and elective contributions to that SEP-IRA cannot exceed the lesser of 25% of the employee's compensation or $51,000 for 2013 ($52,000 for 2014). Filing 1040ez The same rule applies to contributions you make to your own SEP-IRA. Filing 1040ez See Contribution Limits , earlier. Filing 1040ez Figuring the elective deferral. Filing 1040ez   For figuring the 25% limit on elective deferrals, compensation does not include SEP contributions, including elective deferrals or other amounts deferred in certain employee benefit plans. Filing 1040ez Tax Treatment of Deferrals Elective deferrals that are not more than the limits discussed earlier under Limit on Elective Deferrals are excluded from your employees' wages subject to federal income tax in the year of deferral. Filing 1040ez However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Filing 1040ez Excess deferrals. Filing 1040ez   For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Filing 1040ez For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Filing 1040ez The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Filing 1040ez See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Filing 1040ez Excess SEP contributions. Filing 1040ez   Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Filing 1040ez You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Filing 1040ez If you do not notify them within this time period, you must pay a 10% tax on the excess. Filing 1040ez For an explanation of the notification requirements, see Rev. Filing 1040ez Proc. Filing 1040ez 91-44, 1991-2 C. Filing 1040ez B. Filing 1040ez 733. Filing 1040ez If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Filing 1040ez Reporting on Form W-2. Filing 1040ez   Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Filing 1040ez You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Filing 1040ez You must also include them in box 12. Filing 1040ez Mark the “Retirement plan” checkbox in box 13. Filing 1040ez For more information, see the Form W-2 instructions. Filing 1040ez Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Filing 1040ez Also, you cannot make your contributions on the condition that any part of them must be kept in the account after you have made your contributions to the employee's accounts. Filing 1040ez Distributions are subject to IRA rules. Filing 1040ez Generally, you or your employee must begin to receive distributions from a SEP-IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. Filing 1040ez For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Filing 1040ez Additional Taxes The tax advantages of using SEP-IRAs for retirement savings can be offset by additional taxes that may be imposed for all the following actions. Filing 1040ez Making excess contributions. Filing 1040ez Making early withdrawals. Filing 1040ez Not making required withdrawals. Filing 1040ez For information about these taxes, see chapter 1 in Publication 590. Filing 1040ez Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Filing 1040ez Prohibited transaction. Filing 1040ez   If an employee improperly uses his or her SEP-IRA, such as by borrowing money from it, the employee has engaged in a prohibited transaction. Filing 1040ez In that case, the SEP-IRA will no longer qualify as an IRA. Filing 1040ez For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Filing 1040ez Effects on employee. Filing 1040ez   If a SEP-IRA is disqualified because of a prohibited transaction, the assets in the account will be treated as having been distributed to the employee on the first day of the year in which the transaction occurred. Filing 1040ez The employee must include in income the fair market value of the assets (on the first day of the year) that is more than any cost basis in the account. Filing 1040ez Also, the employee may have to pay the additional tax for making early withdrawals. Filing 1040ez Reporting and Disclosure Requirements If you set up a SEP using Form 5305-SEP, you must give your eligible employees certain information about the SEP when you set it up. Filing 1040ez See Setting Up a SEP , earlier. Filing 1040ez Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Filing 1040ez You must also give them notice of any excess contributions. Filing 1040ez For details about other information you must give them, see the instructions for Form 5305-SEP or Form 5305A-SEP (for a salary reduction SEP). Filing 1040ez Even if you did not use Form 5305-SEP or Form 5305A-SEP to set up your SEP, you must give your employees information similar to that described above. Filing 1040ez For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Filing 1040ez Prev  Up  Next   Home   More Online Publications