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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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Taxes

Customer Question

My husband receives a bonus check each year of about $100,000. They take out 43,000 in taxes. Is there any way we can keep more of this? We would like to use it for our children's education.
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

The only thing you can do is to try and structure your tax situation as best you can. Make sure he is taking maximum advantage of all his employer provided benefits including 401(k) contributions, Sec. 125 flexible spending accounts as well as any salary deferral opportunities such as non-qualified deferred compensation plans (usually reserved for top executives and employees). Your husband might also consider talking with his company about compensating him with certain types of life insurance as well as restricted stock. Both of these types of compensation have tax advantages but there is also no immediate cash flow either. Unfortunately thats the general rule, you get taxed when you get the money.


The next thing you need to do is to structure your investments to be as tax efficient as possible within the context of your ability to tolerate risk. This means structuring your portfolio to maximize dividends and long-term capital gains in taxable accounts (i.e. subject to a max tax rate of 15%) and your ordinary and interest income generating investments (i.e. bonds and real estate funds) in tax-deferred accounts. However, you should have some growth investments in your tax-deferred accounts so don't go overboard. Also, consider investing your excess assets in a variable annuity which allows you to invest tax-deferred. Vanguard has an excellent, low-cost variable annuity product. However, remember the trade-off to investing in an annuity is that in exchange for getting the tax-deferral, all distributions of your annuity earnings is consdidered to be ordinary income taxed at your marginal rates. Thus, you want to try to limit distributions from an annuity until you are in a lower tax bracket (i.e. your retired).


Finally, to maximize your education savings I recommend that you look at funding IRC Sec. 529 plans for each of your children.



IRC Sec. 529 plans are generally state sponsored education savings plans. While there is no current federal deduction for contributions to such plans, many states do allow deductions or credits against state income taxes.



Sec. 529 plans allow you to save and invest money for post-secondary (i.e. college) education on a tax-deferred basis (like an IRA). However, if you withdraw the funds and use them to pay for qualified education expenses including tuition and fees, then you may withdraw your contributions and earnings tax-free. Further, you may establish yourself as trustee of the account with your child as beneficiary giving you control over the account. The beneficiary has no rights to the account ever, and should your desire to change the beneficiary (because your child did not go to college) you may do so even naming yourself. You may withdraw the money back (however earnings will be subject to income tax and a 10% penalty, your original contributions may be withdrawn free of tax and penalties). Funds placed in the Sec. 529 accounts are considered removed from your taxable estate making these accounts decent estate planning tools.



Both you and your wife may each contribute up to $55,000 (for a total of $110,000) to one 529 account for your child. If she wants to control her half maybe she would want to set up a separate account. That is permissable.

What you need to do is file form 709 Gift Tax Return for the tax year in which you make the contribution. You can file a combined Form 709 or each of you may file a separate 709. Either way you need to file it and elect to spread your contribution ratably over the next five years. This is done by checking box B in Schedule A of Form 709 (check the forms on the IRS website). I suggest you use a tax preparer who is familiar with gift tax returns. this is something you do not want to screw up. Form 709 is due to be filed at the same date as your federal income tax return.

Once you have done this you and your wife will have effectively exhausted your ability to gift tax-free to your son for the next 5 years. After five years pass, you can then gift the balance. Alternatively, grandparents can make up the difference.

P.S. most state 529 plans have contribution limits in excess of $200,000, so you should not have any problems there.








Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Christopher Phelps and 2 other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: Thank You.

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