Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan).She has the following income items for the year: $$\begin{array} { l r }
\text { Earned income from self-employment } & \$ 50,000 \
\text { Dividend income } & 8,000 \
\text { Interest income } & 2,000 \
\text { Net short-term capital gain } & \underline { 12,000 } \
\text { Adjusted gross income } &\underline { \underline { \$ 72,000 }} \

\end{array}$$ What is the maximum amount that Susan can deduct as a contribution to her retirement plan in 2019, assuming that the self-employment tax rate is 15.3%?
A)$9,235.
B)$12,000.
C)$46,000.
D)$46,468.
E)None of these.

Question

Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan).She has the following income items for the year: $$\begin{array} { l r } 
\text { Earned income from self-employment } & \$ 50,000 \
\text { Dividend income } & 8,000 \
\text { Interest income } & 2,000 \
\text { Net short-term capital gain } & \underline { 12,000 } \
\text { Adjusted gross income } &\underline { \underline { \$ 72,000 }} \

\end{array}$$ What is the maximum amount that Susan can deduct as a contribution to her retirement plan in 2019, assuming that the self-employment tax rate is 15.3%?
A)$9,235.
B)$12,000.
C)$46,000.
D)$46,468.
E)None of these.

Quizplus · Accepted Answer

To calculate the maximum amount that Susan can deduct as a contribution to her retirement plan, we need to use the following formula:

Maximum contribution = (Net self-employment income - 1/2 self-employment tax) x 20%

Net self-employment income = total income - deductible expenses - one-half of self-employment tax

From the information given, we know that Susan has a net income of $80,000, and the self-employment tax rate is 15.3%.

So, self-employment tax = $80,000 x 0.153 = $12,240

One-half of self-employment tax = $6,120

Deductible expenses are not provided, so we will assume they are zero.

Net self-employment income = $80,000 - 0 - $6,120 = $73,880

Therefore, the maximum contribution that Susan can deduct is:

Maximum contribution = ($73,880 - $6,120) x 20%
= $67,760 x 0.20
= $13,552

However, the maximum contribution that Susan can actually make is subject to certain limits. For 2019, the maximum contribution limit is:

Maximum contribution limit = lesser of $56,000 or 25% of compensation

Since Susan's net self-employment income is $73,880, her maximum contribution limit is:

Maximum contribution limit = $73,880 x 0.25
= $18,470

Therefore, the maximum amount that Susan can deduct as a contribution to her retirement plan in 2019 is the lesser of the two limits, which is $13,552.

However, this amount may be further limited by other factors, such as the contribution limits for the specific type of retirement plan she has (in this case, a Keogh plan).

Looking at the answer choices, the closest amount to $13,552 is D) $46,468, which is incorrect. The correct answer is D) $13,552 as explained above.

Susan Is a Self-Employed Accountant with a Qualified Defined Contribution