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Www. Www.taxact.com taxact. Www.taxact.com com Publication 523 - Introductory Material Table of Contents Future Developments Reminders IntroductionOrdering forms and publications. Www.taxact.com Tax questions. Www.taxact.com Useful Items - You may want to see: Future Developments For the latest information about developments related to Publication 523, such as legislation enacted after it was published, go to www. Www.taxact.com irs. Www.taxact.com gov/pub523. Www.taxact.com Reminders Change of address. Www.taxact.com If you change your mailing address, be sure to notify the Internal Revenue Service (IRS) using Form 8822, Change of Address. Www.taxact.com Mail it to the Internal Revenue Service Center for your old address. Www.taxact.com (Addresses for the Service Centers are on the back of the form. Www.taxact.com ) Home sold with undeducted points. Www.taxact.com If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of sale. Www.taxact.com See Points in Publication 936, Home Mortgage Interest Deduction. Www.taxact.com Photographs of missing children. Www.taxact.com The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Www.taxact.com Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Www.taxact.com You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Www.taxact.com Introduction This publication explains the tax rules that apply when you sell your main home. Www.taxact.com In most cases, your main home is the one in which you live most of the time. Www.taxact.com If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). Www.taxact.com See Excluding the Gain , later. Www.taxact.com Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. Www.taxact.com If you have gain that cannot be excluded, you generally must report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040), Capital Gains and Losses. Www.taxact.com You may also have to complete Form 4797, Sales of Business Property. Www.taxact.com See Reporting the Sale , later. Www.taxact.com If you have a loss on the sale, you generally cannot deduct it on your return. Www.taxact.com However, you may need to report it. Www.taxact.com See Reporting the Sale , later. Www.taxact.com The main topics in this publication are: Figuring gain or loss, Basis, Excluding the gain, Ownership and use tests, and Reporting the sale. Www.taxact.com Other topics include: Business use or rental of home, Deducting taxes in the year of sale, and Recapturing a federal mortgage subsidy. Www.taxact.com Net Investment Income Tax (NIIT). Www.taxact.com If any part of the gain on the sale of a home is not excluded under the rules discussed in this publication, it may be subject to the NIIT. Www.taxact.com For more details, see Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions. Www.taxact.com Worksheets. Www.taxact.com Near the end of this publication you will find worksheets you can use to figure your gain (or loss) and your exclusion. Www.taxact.com Use Worksheet 1 to figure the adjusted basis of the home you sold. Www.taxact.com Use Worksheet 2 to figure the gain (or loss), the exclusion, and the taxable gain (if any) on the sale. Www.taxact.com If you do not qualify for the maximum exclusion, use Worksheet 3 to figure your reduced maximum exclusion. Www.taxact.com Date of sale. Www.taxact.com If you received a Form 1099-S, Proceeds From Real Estate Transactions, the date of sale should be shown in box 1. Www.taxact.com If you did not receive this form, the date of sale is the earlier of (a) the date title transferred or (b) the date the economic burdens and benefits of ownership shifted to the buyer. Www.taxact.com In most cases, these dates are the same. Www.taxact.com What is not covered in this publication. Www.taxact.com This publication does not cover the sale of rental property, second homes, or vacation homes. Www.taxact.com For information on how to report any gain or loss from those sales, see Publication 544, Sales and Other Dispositions of Assets. Www.taxact.com Comments and suggestions. Www.taxact.com We welcome your comments about this publication and your suggestions for future editions. Www.taxact.com You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Www.taxact.com NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Www.taxact.com Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Www.taxact.com You can send your comments from www. Www.taxact.com irs. Www.taxact.com gov/formspubs/. Www.taxact.com Click on “More Information” and then on “Comment on Tax Forms and Publications”. Www.taxact.com Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Www.taxact.com Ordering forms and publications. Www.taxact.com Visit www. Www.taxact.com irs. Www.taxact.com gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Www.taxact.com Internal Revenue Service 1201 N. Www.taxact.com Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Www.taxact.com If you have a tax question, check the information available on IRS. Www.taxact.com gov or call 1-800-829-1040. Www.taxact.com We cannot answer tax questions sent to either of the above addresses. Www.taxact.com Useful Items - You may want to see: Publication 527 Residential Rental Property 530 Tax Information for Homeowners 544 Sales and Other Dispositions of Assets 547 Casualties, Disasters, and Thefts 551 Basis of Assets 587 Business Use of Your Home 936 Home Mortgage Interest Deduction 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule D (Form 1040) Capital Gains and Losses 982 Reduction of Tax Attributes Due to Discharge of Indebtedness 1040 U. Www.taxact.com S. Www.taxact.com Individual Income Tax Return 1040NR U. Www.taxact.com S. Www.taxact.com Nonresident Alien Income Tax Return 1040X Amended U. Www.taxact.com S. Www.taxact.com Individual Income Tax Return 1099-S Proceeds From Real Estate Transactions 4797 Sales of Business Property 5405 Repayment of the First-Time Homebuyer Credit 8822 Change of Address 8828 Recapture of Federal Mortgage Subsidy 8939 Allocation of Increase in Basis for Property Acquired From a Decedent 8949 Sales and Other Dispositions of Capital Assets W-2 Wage and Tax Statement See How To Get Tax Help , near the end of this publication, for information about getting these publications and forms. Www.taxact.com Prev Up Next Home More Online Publications
Tax Information for Bond Professionals
IRS Revises Form for Tax-Exempt Bonds
IR-2005-12– The IRS today released a revised form used by municipalities and other issuers of tax-exempt bonds to make arbitrage related payments.
Circular 230 Tax Professionals
The Office of Professional Responsibility (OPR) establishes and enforces consistent standards of competence, integrity and conduct for tax professionals enrolled agents, attorneys, CPAs, and other individuals and groups covered by Circular 230.
Index of Applicable Federal Rates (AFRs)
Each month, the IRS provides various prescribed rates for federal income tax purposes. These rates, known as Applicable Federal Rates, or AFRs, are regularly published as Revenue Rulings. The Revenue Rulings containing current and recent-past AFRs are available here in Adobe PDF format.
TEB CPE Texts
A series of articles published by the Service as the Tax Exempt Bonds Continuing Professional Education Technical Instruction Program.
Page Last Reviewed or Updated: 19-Feb-2014
Www. Www.taxact.com taxact. Www.taxact.com com 2. Www.taxact.com 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. Www.taxact.com 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. Www.taxact.com Deferral percentage. Www.taxact.com Employee compensation. Www.taxact.com Compensation of self-employed individuals. Www.taxact.com Choice not to treat deferrals as compensation. Www.taxact.com Limit on Elective Deferrals Tax Treatment of Deferrals Distributions (Withdrawals) Additional TaxesEffects on employee. Www.taxact.com 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. Www.taxact.com S. Www.taxact.com 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. Www.taxact.com Under a SEP, you make contributions to a traditional individual retirement arrangement (called a SEP-IRA) set up by or for each eligible employee. Www.taxact.com A SEP-IRA is owned and controlled by the employee, and you make contributions to the financial institution where the SEP-IRA is maintained. Www.taxact.com SEP-IRAs are set up for, at a minimum, each eligible employee (defined below). Www.taxact.com 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). Www.taxact.com Eligible employee. Www.taxact.com An eligible employee is an individual who meets all the following requirements. Www.taxact.com Has reached age 21. Www.taxact.com Has worked for you in at least 3 of the last 5 years. Www.taxact.com Has received at least $550 in compensation from you in 2013. Www.taxact.com This amount remains the same in 2014. Www.taxact.com You can use less restrictive participation requirements than those listed, but not more restrictive ones. Www.taxact.com Excludable employees. Www.taxact.com The following employees can be excluded from coverage under a SEP. Www.taxact.com Employees covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. Www.taxact.com Nonresident alien employees who have received no U. Www.taxact.com S. Www.taxact.com source wages, salaries, or other personal services compensation from you. Www.taxact.com For more information about nonresident aliens, see Publication 519, U. Www.taxact.com S. Www.taxact.com Tax Guide for Aliens. Www.taxact.com Setting Up a SEP There are three basic steps in setting up a SEP. Www.taxact.com You must execute a formal written agreement to provide benefits to all eligible employees. Www.taxact.com You must give each eligible employee certain information about the SEP. Www.taxact.com A SEP-IRA must be set up by or for each eligible employee. Www.taxact.com Many financial institutions will help you set up a SEP. Www.taxact.com Formal written agreement. Www.taxact.com You must execute a formal written agreement to provide benefits to all eligible employees under a SEP. Www.taxact.com You can satisfy the written agreement requirement by adopting an IRS model SEP using Form 5305-SEP. Www.taxact.com However, see When not to use Form 5305-SEP, below. Www.taxact.com If you adopt an IRS model SEP using Form 5305-SEP, no prior IRS approval or determination letter is required. Www.taxact.com Keep the original form. Www.taxact.com Do not file it with the IRS. Www.taxact.com Also, using Form 5305-SEP will usually relieve you from filing annual retirement plan information returns with the IRS and the Department of Labor. Www.taxact.com See the Form 5305-SEP instructions for details. Www.taxact.com If you choose not to use Form 5305-SEP, you should seek professional advice in adopting a SEP. Www.taxact.com When not to use Form 5305-SEP. Www.taxact.com You cannot use Form 5305-SEP if any of the following apply. Www.taxact.com You currently maintain any other qualified retirement plan other than another SEP. Www.taxact.com You have any eligible employees for whom IRAs have not been set up. Www.taxact.com You use the services of leased employees, who are not your common-law employees (as described in chapter 1). Www.taxact.com 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. Www.taxact.com An affiliated service group described in section 414(m). Www.taxact.com A controlled group of corporations described in section 414(b). Www.taxact.com Trades or businesses under common control described in section 414(c). Www.taxact.com You do not pay the cost of the SEP contributions. Www.taxact.com Information you must give to employees. Www.taxact.com 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. Www.taxact.com An IRS model SEP is not considered adopted until you give each employee this information. Www.taxact.com Setting up the employee's SEP-IRA. Www.taxact.com A SEP-IRA must be set up by or for each eligible employee. Www.taxact.com SEP-IRAs can be set up with banks, insurance companies, or other qualified financial institutions. Www.taxact.com You send SEP contributions to the financial institution where the SEP-IRA is maintained. Www.taxact.com Deadline for setting up a SEP. Www.taxact.com 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. Www.taxact.com Credit for startup costs. Www.taxact.com 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. Www.taxact.com For more information, see Credit for startup costs under Reminders, earlier. Www.taxact.com 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. Www.taxact.com If you are self-employed, you can contribute to your own SEP-IRA. Www.taxact.com Contributions must be in the form of money (cash, check, or money order). Www.taxact.com You cannot contribute property. Www.taxact.com However, participants may be able to transfer or roll over certain property from one retirement plan to another. Www.taxact.com See Publication 590 for more information about rollovers. Www.taxact.com You do not have to make contributions every year. Www.taxact.com 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). Www.taxact.com 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. Www.taxact.com Contributions are deductible within limits, as discussed later, and generally are not taxable to the plan participants. Www.taxact.com A SEP-IRA cannot be a Roth IRA. Www.taxact.com Employer contributions to a SEP-IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. Www.taxact.com Unlike regular contributions to a traditional IRA, contributions under a SEP can be made to participants over age 70½. Www.taxact.com If you are self-employed, you can also make contributions under the SEP for yourself even if you are over 70½. Www.taxact.com Participants age 70½ or over must take required minimum distributions. Www.taxact.com Time limit for making contributions. Www.taxact.com To deduct contributions for a year, you must make the contributions by the due date (including extensions) of your tax return for the year. Www.taxact.com 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. Www.taxact.com Compensation generally does not include your contributions to the SEP. Www.taxact.com The SEP plan document will specify how the employer contribution is determined and how it will be allocated to participants. Www.taxact.com Example. Www.taxact.com Your employee, Mary Plant, earned $21,000 for 2013. Www.taxact.com The maximum contribution you can make to her SEP-IRA is $5,250 (25% x $21,000). Www.taxact.com Contributions for yourself. Www.taxact.com 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. Www.taxact.com However, special rules apply when figuring your maximum deductible contribution. Www.taxact.com See Deduction Limit for Self-Employed Individuals , later. Www.taxact.com Annual compensation limit. Www.taxact.com You cannot consider the part of an employee's compensation over $255,000 when figuring your contribution limit for that employee. Www.taxact.com However, $51,000 is the maximum contribution for an eligible employee. Www.taxact.com These limits are $260,000 and $52,000, respectively, in 2014. Www.taxact.com Example. Www.taxact.com Your employee, Susan Green, earned $210,000 for 2013. Www.taxact.com Because of the maximum contribution limit for 2013, you can only contribute $51,000 to her SEP-IRA. Www.taxact.com More than one plan. Www.taxact.com 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. Www.taxact.com When you figure this limit, you must add your contributions to all defined contribution plans maintained by you. Www.taxact.com 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. Www.taxact.com Tax treatment of excess contributions. Www.taxact.com 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. Www.taxact.com 25% of the employee's compensation (or, for you, 20% of your net earnings from self-employment). Www.taxact.com $51,000. Www.taxact.com 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. Www.taxact.com For more information on employee tax treatment of excess contributions, see chapter 1 in Publication 590. Www.taxact.com Reporting on Form W-2. Www.taxact.com Do not include SEP contributions on your employee's Form W-2 unless contributions were made under a salary reduction arrangement (discussed later). Www.taxact.com Deducting Contributions Generally, you can deduct the contributions you make each year to each employee's SEP-IRA. Www.taxact.com If you are self-employed, you can deduct the contributions you make each year to your own SEP-IRA. Www.taxact.com 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. Www.taxact.com Your contributions (including any excess contributions carryover). Www.taxact.com 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. Www.taxact.com In 2014, the amounts in (2) above are $260,000 and $52,000, respectively. Www.taxact.com 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. Www.taxact.com 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. Www.taxact.com The deduction for the deductible part of your self-employment tax. Www.taxact.com The deduction for contributions to your own SEP-IRA. Www.taxact.com The deduction for contributions to your own SEP-IRA and your net earnings depend on each other. Www.taxact.com 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. Www.taxact.com 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. Www.taxact.com Then figure your maximum deduction by using the Deduction Worksheet for Self-Employed in chapter 5. Www.taxact.com 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. Www.taxact.com However, the carryover, when combined with the contribution for the later year, is subject to the deduction limit for that year. Www.taxact.com 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. Www.taxact.com Excise tax. Www.taxact.com If you made nondeductible (excess) contributions to a SEP, you may be subject to a 10% excise tax. Www.taxact.com For information about the excise tax, see Excise Tax for Nondeductible (Excess) Contributions under Employer Deduction in chapter 4. Www.taxact.com When To Deduct Contributions When you can deduct contributions made for a year depends on the tax year on which the SEP is maintained. Www.taxact.com 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. Www.taxact.com 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. Www.taxact.com Example. Www.taxact.com You are a fiscal year taxpayer whose tax year ends June 30. Www.taxact.com You maintain a SEP on a calendar year basis. Www.taxact.com You deduct SEP contributions made for calendar year 2013 on your tax return for your tax year ending June 30, 2014. Www.taxact.com Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. Www.taxact.com 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. Www.taxact.com S. Www.taxact.com Return of Partnership Income; and corporations deduct them on Form 1120, U. Www.taxact.com S. Www.taxact.com Corporation Income Tax Return, or Form 1120S, U. Www.taxact.com S. Www.taxact.com Income Tax Return for an S Corporation. Www.taxact.com Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. Www.taxact.com (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. Www.taxact.com , you receive from the partnership. Www.taxact.com ) 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. Www.taxact.com Salary Reduction Simplified Employee Pensions (SARSEPs) A SARSEP is a SEP set up before 1997 that includes a salary reduction arrangement. Www.taxact.com (See the Caution, next. Www.taxact.com ) 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. Www.taxact.com 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. Www.taxact.com You are not allowed to set up a SARSEP after 1996. Www.taxact.com 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. Www.taxact.com If you are interested in setting up a retirement plan that includes a salary reduction arrangement, see chapter 3. Www.taxact.com 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. Www.taxact.com At least 50% of your employees eligible to participate choose to make elective deferrals. Www.taxact.com You have 25 or fewer employees who were eligible to participate in the SEP at any time during the preceding year. Www.taxact.com The elective deferrals of your highly compensated employees meet the SARSEP ADP test. Www.taxact.com SARSEP ADP test. Www.taxact.com 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. Www.taxact.com A highly compensated employee is defined in chapter 1. Www.taxact.com Deferral percentage. Www.taxact.com The deferral percentage for an employee for a year is figured as follows. Www.taxact.com 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. Www.taxact.com Employee compensation. Www.taxact.com For figuring the deferral percentage, compensation is generally the amount you pay to the employee for the year. Www.taxact.com Compensation includes the elective deferral and other amounts deferred in certain employee benefit plans. Www.taxact.com See Compensation in chapter 1. Www.taxact.com 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. Www.taxact.com Compensation of self-employed individuals. Www.taxact.com If you are self-employed, compensation is your net earnings from self-employment as defined in chapter 1. Www.taxact.com Compensation does not include tax-free items (or deductions related to them) other than foreign earned income and housing cost amounts. Www.taxact.com Choice not to treat deferrals as compensation. Www.taxact.com 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. Www.taxact.com Limit on Elective Deferrals The most a participant can choose to defer for calendar year 2013 is the lesser of the following amounts. Www.taxact.com 25% of the participant's compensation (limited to $255,000 of the participant's compensation). Www.taxact.com $17,500. Www.taxact.com The $17,500 limit applies to the total elective deferrals the employee makes for the year to a SEP and any of the following. Www.taxact.com Cash or deferred arrangement (section 401(k) plan). Www.taxact.com Salary reduction arrangement under a tax-sheltered annuity plan (section 403(b) plan). Www.taxact.com SIMPLE IRA plan. Www.taxact.com In 2014, the $255,000 limit increases to $260,000 and the $17,500 limit remains at $17,500. Www.taxact.com Catch-up contributions. Www.taxact.com A SARSEP can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. Www.taxact.com The catch-up contribution limit for 2013 is $5,500 and remains at $5,500 for 2014. Www.taxact.com 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). Www.taxact.com However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. Www.taxact.com The catch-up contribution limit. Www.taxact.com The excess of the participant's compensation over the elective deferrals that are not catch-up contributions. Www.taxact.com 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). Www.taxact.com Overall limit on SEP contributions. Www.taxact.com 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). Www.taxact.com The same rule applies to contributions you make to your own SEP-IRA. Www.taxact.com See Contribution Limits , earlier. Www.taxact.com Figuring the elective deferral. Www.taxact.com 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. Www.taxact.com 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. Www.taxact.com However, these deferrals are included in wages for social security, Medicare, and federal unemployment (FUTA) tax. Www.taxact.com Excess deferrals. Www.taxact.com For 2013, excess deferrals are the elective deferrals for the year that are more than the $17,500 limit discussed earlier. Www.taxact.com For a participant who is eligible to make catch-up contributions, excess deferrals are the elective deferrals that are more than $23,000. Www.taxact.com The treatment of excess deferrals made under a SARSEP is similar to the treatment of excess deferrals made under a qualified plan. Www.taxact.com See Treatment of Excess Deferrals under Elective Deferrals (401(k) Plans) in chapter 4. Www.taxact.com Excess SEP contributions. Www.taxact.com Excess SEP contributions are elective deferrals of highly compensated employees that are more than the amount permitted under the SARSEP ADP test. Www.taxact.com You must notify your highly compensated employees within 2½ months after the end of the plan year of their excess SEP contributions. Www.taxact.com If you do not notify them within this time period, you must pay a 10% tax on the excess. Www.taxact.com For an explanation of the notification requirements, see Rev. Www.taxact.com Proc. Www.taxact.com 91-44, 1991-2 C. Www.taxact.com B. Www.taxact.com 733. Www.taxact.com If you adopted a SARSEP using Form 5305A-SEP, the notification requirements are explained in the instructions for that form. Www.taxact.com Reporting on Form W-2. Www.taxact.com Do not include elective deferrals in the “Wages, tips, other compensation” box of Form W-2. Www.taxact.com You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. Www.taxact.com You must also include them in box 12. Www.taxact.com Mark the “Retirement plan” checkbox in box 13. Www.taxact.com For more information, see the Form W-2 instructions. Www.taxact.com Distributions (Withdrawals) As an employer, you cannot prohibit distributions from a SEP-IRA. Www.taxact.com 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. Www.taxact.com Distributions are subject to IRA rules. Www.taxact.com 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. Www.taxact.com For more information about IRA rules, including the tax treatment of distributions, rollovers, required distributions, and income tax withholding, see Publication 590. Www.taxact.com 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. Www.taxact.com Making excess contributions. Www.taxact.com Making early withdrawals. Www.taxact.com Not making required withdrawals. Www.taxact.com For information about these taxes, see chapter 1 in Publication 590. Www.taxact.com Also, a SEP-IRA may be disqualified, or an excise tax may apply, if the account is involved in a prohibited transaction, discussed next. Www.taxact.com Prohibited transaction. Www.taxact.com 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. Www.taxact.com In that case, the SEP-IRA will no longer qualify as an IRA. Www.taxact.com For a list of prohibited transactions, see Prohibited Transactions in chapter 4. Www.taxact.com Effects on employee. Www.taxact.com 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. Www.taxact.com 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. Www.taxact.com Also, the employee may have to pay the additional tax for making early withdrawals. Www.taxact.com 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. Www.taxact.com See Setting Up a SEP , earlier. Www.taxact.com Also, you must give your eligible employees a statement each year showing any contributions to their SEP-IRAs. Www.taxact.com You must also give them notice of any excess contributions. Www.taxact.com 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). Www.taxact.com 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. Www.taxact.com For more information, see the instructions for either Form 5305-SEP or Form 5305A-SEP. Www.taxact.com Prev Up Next Home More Online Publications