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:

Earned income from self-employment $50,000
Dividend income 8,000
Interest income 2,000
Net short-term capital gain 12,000
Adjusted gross income $72,000
What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2015, assuming the self-employment tax rate is 15.3%?
a. $9,235.
b. $12,000.
c. $46,000.
d. $46,468.
e. None of the above.

Answer 1

The maximum amount Susan can deduct as a contribution to her retirement plan is determined by calculating the net earnings from self-employment. The maximum amount Susan can deduct as a contribution to her retirement plan in 2015, assuming the self-employment tax rate is 15.3% is $9,235. Therefore, the correct answer is a. $9,235.

Step-by-step explanation:

The maximum amount Susan can deduct as a contribution to her retirement plan is determined by calculating the net earnings from self-employment. The self-employment tax rate is 15.3%, and half of this tax is deductible for income tax purposes.

Net earnings from self-employment = Earned income - (0.5 * self-employment tax)

= $50,000 - (0.5 * 0.153 * $50,000)

= $50,000 - $3,825

= $46,175

Since Susan's earned income is the lower of $50,000 or $46,175, the maximum deductible contribution to her retirement plan is the lesser of 20% of earned income or the contribution limit:

Maximum contribution = min(20% of earned income, contribution limit)

= min(0.20 * $46,175, $57,000)

= min($9,235, $57,000)

= $9,235

Therefore, the correct answer is:

a. $9,235.