Because of a typographical error, the column "Your Balance Sheet" in yesterday's Washington Business incorrectly stated the maximum tax-deductible amount for a contribution to a defined-contribution money-purchase Keogh plan. The correct figure is 25 percent.

Q: Some time ago, I read (although I don't remember where) that the Deficit Reduction Act of 1984 provided for a return to the interpretation of "compensation" that effectively allows a 25 percent deduction for a Keogh plan instead of the 20 percent resulting from the previous interpretation. Can you confirm this?

A: Yes, what I call the Tax Reform Act (a part of the Deficit Reduction Act, which also included some cost-cutting provisions) did modify the definition of compensation. But -- and here it gets pretty complicated -- the change applies only to the calculations for figuring the maximum deduction, not the maximum contribution.

The maximum amount you may deduct on your tax return for a contribution to your defined-contribution money-purchase Keogh plan is 35 percent of net earnings from self-employment. It is no longer required (starting with 1984 tax returns) to subtract the amount of the deduction first -- requiring the application of a mathematical formula.

But the maximum amount you may contribute to your Keogh plan is 25 percent of net earnings from self-employment after subtracting the allowable deduction. Because you may not deduct on your tax return any greater amount than you actually contribute to the plan, the lower ceiling still applies.

Perhaps an example will help. John Consultant has 1984 net earnings from his business, after expenses, of $40,000. The maximum deduction he may claim on his 1984 tax return for contributions to his Keogh plan is $10,000 -- 25 percent of $40,000.

But he may only contribute something less than that, stated as 25 percent of net earnings after subtracting the Keogh deduction itself. Because he is not permitted to deduct on his tax return an amount greater than his actual contribution, poor Consultant is effectively limited to that lower figure.

It turns out that there is a very simple way to know what the maximum allowable contribution is. Simply multiply qualifying earnings by 20 percent; the result is equal to 35 percent of the net earnings figure -- that is, gross earnings minus the maximum Keogh contribution.

(He may make additional voluntary nondeductible contributions to his plan. Although these won't provide a current tax deduction, tax liability is deferred on earnings on the voluntary contributions.)

This "nothing" change works out this way only for a self-employed individual with no exmployes, who has a defined-contribution money-purchase Keogh plan (the kind most sole proprietors have). There is some significance to the change in other cases -- a profit-sharing plan, for instance, where the annual ceiling on deductions is 15 rather than 25 percent; or for employes of an unincorporated business, where both employer and employe contributions are involved.

(Note: Although the numbers in my example didn't get that high, the annual contribution for each participant in a defined contribution plan may not exceed $30,000 regardless of how the percentages work out.)

Q: Each of my children (ages 3 and 5) has savings accounts in his own name and with his Social Security number. For 1984, each earned interest of about $150. Should I file an income tax return for each child? I didn't report the income on my return, and I don't want to be audited for this.

A: Don't worry about an audit -- because the accounts properly use the child's Social Security number, the tax liability is his, not yours. And at that income level, you don't have to file returns for them this year.

In this situation, there is no liability for a tax return unless the child has unearned income for the year in excess of his personal exemption. The exemption for 1984 was $1,000; for 1985, it is $1,040. Under present law, the personal exemption is indexed -- that is, it will go up each year in accordance with the increase in the cost of living.