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Financial Questions and Answers

Q: I have two young children. Are there advantages to opening a Section 529 plan to save for their college educations?

A: Investment earnings in a 529 plan accumulate tax deferred and will not be subject to federal income taxes when withdrawn to pay for a beneficiary’s qualified higher education expenses. You are not locked in to choosing the plan offered by your state of residence — many Section 529 plans are open to nonresidents. However, some states offer their residents tax incentives for investing in an in-state plan. Your contributions to a Section 529 plan are not limited by your income. Additionally, if your child does not attend college, you can generally change the beneficiary to another qualifying family member without losing tax benefits.

Q: I want to pay my three employees bonuses this year. Will I have to withhold taxes on those payments?

A: The IRS considers bonuses to be “supplemental wage payments” and requires employers to withhold income taxes from them. Supplemental wages are defined as compensation paid in addition to regular wages and also include vacation pay, back pay, severance pay, overtime, commissions, and taxable fringe benefits. Generally, there are two ways of taxing bonuses: the optional flat-rate method, which allows employers to simply withhold a uniform 25% of the bonus, and the aggregate method, which requires combining the bonus and regular wages for withholding purposes.

August 2016 Newsletter Previous Article