The intent of the new tax law was to raise the maximum deduction for SEP (simplified employee pension) plans-a retirement savings vehicle commonly used to shelter income from self-employment–from 15 percent to 25 percent of compensation. This would permit a $40,000 contribution for 2002. However, the tax writers only went half-way: One section of the tax code was amended but another section wasn’t amended. As a result, you can only deduct 15 percent. With a compensation limit of $200,000 in effect for 2002, that would effectively limit SEP contributions to $30,000.
The IRS has said that this was not the intent of the law–a $40,000 limit was intended. A technical correction is expected to be passed by Congress some time this year, bringing the maximum SEP deduction up to $40,000. You don’t have to make a 2002 contribution until 2003 (perhaps as late as October 15, 2003), so you’ll have time to see if the maximum really is $40,000, not $30,000.
** For more information about how these new tax laws affect you, we have published an in-depth guide that walks you through–in plain English-all of the new tax laws of 2001 tax year, Your Guide to Understanding the New Tax Law. Go to https://www.fedweek.com/Publications/default.asp for more information or see item number 10 below for more details. **