Your Guide to the New York 529 Tax Deduction -

By: Rita Cunha

Saving for college with 529 College Savings Plans has a lot of advantages. One of them is that you can get state tax benefits when you join the New York 529 College Savings Plan. Today, we’re going over everything you need to know about the New York 529 tax deduction program. We will show you just how much money you can save through state tax deductions, tax-free growth, and tax-free withdrawals. Keep reading to learn more.

What Is the New York 529 Plan?

New York’s 529 College Savings Plan is a special account that helps you pay for your child’s higher education. This includes paying for college or other post-secondary school tuition and qualified education expenses, including registered apprenticeship program expenses.

In some instances, New York 529 plan funds can be used for qualified education loan repayments (paying off eligible student loans).

The New York 529 Plan is offered by Vanguard Group Inc and has Ascensus Broker Dealer Services LLC as its program manager. Although it is based in New York state (hence the name), it’s open to all U.S. residents. The state comptroller and the New York Higher Education Services Corporation (HESC) are jointly responsible for implementing the Program, but Ascensus College Savings is responsible for the program’s day to day operations.

What’s special about this plan is that, unlike other savings accounts, you can watch your balance grow more rapidly. Thanks to several mutual funds investment options you can choose from, your contributions get invested wisely. Really, your money is working for you thanks to this 529 plan.

Moreover, New York’s 529 College Savings Program—Direct Plan carries very low fees, so you can save money faster.

Besides helping you save for college, New York’s 529 College Savings Program allows you to reap rewards every day. When you link it to a Upromise account, you get cashback rewards on purchases. And did we mention you also get the chance to enter your child for scholarships?

Senior program director of 529 plans, Derek, explains to Stacy how the NY 529 plan works including the New York 529 tax deduction.

What Can You Spend Your 529 Savings On?

Your 529 savings should only be spent on qualified higher education expenses. In other words, you can spend that money on college tuition, administrative fees, room and board, books, textbooks, computers, and more.

Remember that you don’t have to spend your savings on New York state higher education services. You are free to spend it at any higher education institution in the country.

That said, if you withdraw your New York 529 College Savings funds for other purposes (say, buying a car), you’ll be subject to tax recaptures and penalties.

How Does the NY 529 Plan Work?

Before we get to the juicy tax benefits that New York’s 529 College Savings Program offers, we have to learn how it works. Fortunately, that’s easy enough.

Who Can Open an Account?

Any U.S. resident (citizen and otherwise) can open a New York’s 529 College Savings Account. You do not have to be a New York state tax payer or resident.

Moreover, you do not need any knowledge of mutual funds. Vanguard Inc. and Ascensus Broker Dealer offer several easy-to-digest investment options for you to choose from. The age-based investment path is one that stands out, but you do not have to choose it if you don’t want to.

How Much Can You Contribute?

You can deposit however little or much you want, as there are no contribution requirements. As long as the account balance does not exceed $520,000, all contributions are welcomed.

However, you should consult your tax advisor to learn of any possible “gift tax” your contributions may be subject to if you donate high amounts in a year.

Contributions to your New York 529 Plan can be made online on NYsaves.org or funds can be mailed in. For that mail address or any other questions about NY’s 529 College Savings Program, call 1-877-697-2837. Phone lines are open 8am – 8pm EST Monday through Friday.

Who Can Make Contributions?

Anyone can make contributions. This means that parents, grandparents, uncles and cousins, and even family friends can contribute to the college fund. Yet, this doesn’t mean that all those who contribute will reap this 529’s tax benefits.

Contributions are not deductible for federal income tax purposes, but there are there are some benefits for state of New York taxpayers including a generous New York state tax deduction.

Can a New York 529 Plan Lose Money?

While 529 plans are considered to be a safe vehicle of investment (and they are sponsored by states), keep in mind that any investment carries with it certain risks.

Investing in the New York 529 Plan involves certain risks, including the possibility that you may lose money invested over short periods or even long periods of time. None of the State of New York, agencies, applicable affiliates, program administrators, the Federal Deposit Insurance Corporation (FDIC), The Vanguard Group, or Ascensus College Savings insures accounts or can guarantee the principal deposited therein or guarantee any investment returns on any 529 plan account or investment portfolio.

Nothing within this article should be construed as legal or tax advice. Consult an investment manager or qualified tax professional regarding any questions about investment objectives or your New York state income taxes, including any New York state tax deductions or other state benefits.

Do You Get a Tax Deduction for Contributing to a NY 529 Plan?

One of the best things about this account is that it allows for state income tax deductions. While you can’t deduct contributions for federal income taxes, you can lower your state taxable income considerably with New York’s 529 College Savings Program.

A. New York Residents

Yes, residents in the state of New York can deduct contributions to 529 plans from their New York state taxable income. Yes, residents in the state of New York can deduct contributions to 529 plans from their New York state taxable income. Currently, one can deduct up to $5,000 per year for single New York filers and $10,000 per year for New York taxpayers who are married filing jointly.

Looking at an example makes this easier to understand. Let’s say a married couple (who files jointly) has a yearly household income of $100,000. If they put $500 into their child’s NY 529 account every month, they can save $358 per year on their New York state income tax.

Note that only the account owner (and their spouse, if filing jointly) can enjoy the benefits of the New York state income tax deduction scheme. Grandparents who are not the account owners, for example, can’t.

B. Residents of Tax-Parity States

Residents of seven other states can also lower their state taxable income by deducing their 529 contributions.

How much money can get deducted—and who can deduct—varies from state to state.

Arizona

Deduction limit of $2,000 per year for single filers and $4,000 per year for joint filers.
Anyone who contributes and files taxes can take advantage of this break (even if they are not the account owner of the 529 plans).

Arkansas

Deduction limit of $3,000 per year for single filers and $6,000 per year for joint filers.
Any taxpayer (not just the account owner) may take advantage of these perks.

Kansas

Deduction limit of $3,000 per year for single filers and $6,000 per year when filing jointly.
The limits are valid for each beneficiary of NY 529 plans. Thus, families with two or more children see their deduction limit raised, opening the way for more savings.
Anyone who contributes (even if they don’t own the 529 college savings program) can take advantage of these state tax deduction perks.

Minnesota

Valid deductions are capped at $1,500 per year for single filers and $3,000 per year for joint filers.
Any taxpayer (not just the account owner) can enjoy this state income tax benefit.

Missouri

The deduction limit for 529 plans currently sits at $8,000 per year for single filers and $16,000 per year for married couples filing jointly.
Only the account owner can deduct their contributions to this 529 account.

Montana

Legal deductions are capped at $3,000 per year for single filers and $6,000 per year for joint filers.
Only the account owner is allowed to deduct any contributions to a 529 account.

Pennsylvania

Deduction limit of $15,000 per year for single filers and $30,000 per year for joint filers.
These limits apply to each beneficiary of the NY 529 college savings program. Thus, families with multiple kids can claim higher deductions and save even more on state income tax.
All Pennsylvania taxpayers who contribute to this NY 529 account can claim the perks.

For full details, read through the New York 529 Plan Disclosure Booklet and Tuition Savings Agreement. Information below is a brief overview of tax-parity state benefits. Other benefits may apply. The information was current as of the date of the article’s last published update.

C. Residents of Other States

Residents of all other states cannot deduct NY 529 contributions from their state taxable income.

What Other Tax Benefits Are There?

On top of tax deductions, you can get other tax benefits. Let’s look at the other two main perks of opening this type of account.

Tax-Free Growth

You can watch your savings grow tax-free as you sit back. Capital accrued from investments is not subject to federal income tax, meaning you and your child get to keep it for the future.

Tax-Free Withdrawals

Additionally, New York state’s 529 plan withdrawals spent on qualified higher education expenses are not taxable either. These distributions won’t be eaten away by state income tax or federal income tax.

Is It a Good Idea to Get a New York State’s 529 Plan?

What we have done here is give you a general overview of how the New York 529 deduction scheme works. As you’ve seen, if you’re a New York resident (or a resident of the seven tax-parity states), opening this account could be a great idea. More so since it doesn’t interfere with financial aid scholarship funds.

But if you’re a resident of another state, it might be best to open an in-state 529 account to claim tax deductions.

Either way, you should consult your tax advisor for personalized guidance on what tax breaks you may be subject to. They will be able to answer all your questions and better help you make the right decision for you.

Your Guide to the New York 529 Tax Deduction