529 Contributions

Today TaxMama hears from Rick in New Jersey with this stroke of genius. “I am a salaried employee for ABC company and will be doing a separate consulting engagement for another company in my spare time. I’d like to take the entire $55,000 I will earn and put it directly into a 529 college plan for my son, who is a senior and will be attending college in the fall of 2010. Do I need to report the $55K income to the IRS?”

TaxMama answers a question on Tax

Dear Rick,

That’s a brilliant strategy!

Now, if only the tax code would support it.

Of course you’re going to have to pay income taxes on the consulting fees. Heck, you’re even going to have to pay self-employment taxes on that money. That’s going to cost you an extra 15.3% on top of your 32% – 35% federal and state tax bracket.

If you’re going to be earning that kind of money freelancing, you really need to invest in a good tax professional who can help you structure your business so that you can take the best advantage of deductions available to you. With a bit of good planning, you can really minimize your taxable profits and maximize the money you can set aside for your son’s college.

Incidentally, contributions to IRC Sec. 529 plans are not deductible.
They are simply exempt from gift tax. If your son is starting college so soon, there’s no need for the complexities and restrictions of the 529 plan. You’re better off paying his tuition and taking advantage of some of the higher education deductions or credits in the ARRA.

And remember, you can find answers to all kinds of questions about being self-employed, 529 plans and other tax issues, free. Where? Where else? At TaxMama.com.

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