Tax Benefits of New York's 529 College Savings Program

What New York Offers Contributors to College Education Savings Plans

Young woman doing her taxes w/ her daughter

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If you live in the Empire State, and are planning to put a child through college, the good news is that New York offers a substantial tax deduction for residents who contribute to its 529 College Savings Program. Single taxpayers can get a New York State income tax deduction of up to $5,000, while married couples who file jointly can get a deduction of up to $10,000.

529 Plans offer tax-advantaged ways to save money. If enough money is saved through this vehicle, there is less stress at admissions time about applying for financial aid or searching for scholarships. Investments made in these accounts grow free of federal and state income taxes. In addition, all withdrawals used for qualified higher education expenses are exempt from federal income tax. New York is one of 33 states and the District of Columbia that offer residents a tax deduction or tax credit.

Through these tax-deductible plans, family members and friends can contribute to a child's college fund, and get a tax benefit for doing so. Over the years, with regular contributions and compound interest, the plan can grow significantly to provide for the child's educational expenses. New York offers two 529 Savings Plan options:

  • New York's 529 Program (Direct): Managed by Vanguard and Upromise Investments, this plan offers three age-based portfolio options (conservative, moderate and aggressive) and 13 individual fund portfolio options (four multi-fund and nine single fund). Age-based portfolios shift their asset allocation over time from aggressive to increasingly conservative as the student approaches college age. Additional individual investment options include those designed to track strategies including aggressive growth and income-producing investments or developed market, value stock or bond indexes. Morningstar notes that the plan is one of the least expensive direct-sold plans available, and it praises the tax benefits for state residents. The minimum amount you must contribute to New York's 529 Direct Plan to open an account is $25.
  • New York's 529 Program (Advisor-Guided): This advisor-sold plan offers a mix of multi-fund investments as well as individual mutual funds. Your advisor can help you choose from three distinct approaches to underlying funds from J.P. Morgan and exchange-traded funds from State Street Global Advisors - age-based portfolios, asset allocation portfolios, and individual portfolios. Morningstar highlights the plan's solid structure and well-diversified age-based option. This program requires an initial contribution of $1,000 and $25 contributions thereafter.

Overview of the New York College 529 Savings Plan Tax Deduction

The maximum contribution limit for all New York plans is $375,000. Up to $10,000 is deductible annually from New York State taxable income for married couples filing jointly; single taxpayers can deduct up to $5,000 annually. State tax benefits for non-resident New York taxpayers may vary. State tax deductions may be subject to recapture in certain circumstances such as rollovers to another state's 529 plan or nonqualified withdrawals. Please consult your tax advisor for more information to your specific situation.

Adding to its attractiveness is the fact that residents do not need to itemize their other deductions to claim a benefit from their NY 529 College Savings Program. In other words, if you are not able to deduct anything else, you’ll still be able to deduct your contributions to the plan from your gross income.

As with most states, distributions from the direct plan that are not used for qualified education expenses are subject to taxation, and also a possible “recapture” of deductions taken in previous years.

Value of the New York College Savings Plan Tax Deduction

If you are a New Yorker trying to choose between the 529 college savings program and other college savings vehicles, you need to account for the potential tax savings of the New York deduction for residents.

Remember that New Yorkers only receive a deduction for contributing to the 529 plan and not for plans from any other state. If, for example, a NY state taxable income of $318,750 - $2,125,450 incurs a tax rate of 6.85%, a contribution of $5,000 could potentially save $342.50 at tax time. In other words, receiving the deduction could be similar to a 6.85 percent bonus on the amount contributed.