New York May Deviate From The New 529 Rules
When the new tax rules were implemented on January 1, 2018, a popular college savings vehicle that goes by the name of a “529 plan” received a boost. Prior to the new tax rules, 529 plans could only be used to pay for college. The new tax rules allow account owners to withdraw up to $10,000 per year per child for K – 12 public school, private school,
When the new tax rules were implemented on January 1, 2018, a popular college savings vehicle that goes by the name of a “529 plan” received a boost. Prior to the new tax rules, 529 plans could only be used to pay for college. The new tax rules allow account owners to withdraw up to $10,000 per year per child for K – 12 public school, private school, religious school, or homeschooling expenses. These distributions would be considered “qualified” which means distributions are made tax free.
Initially we expected this new benefit to be a huge tax advantage for our clients that have children that attend private school. They could fully fund a 529 plan up to $10,000 per year, capture a New York State tax deduction for the $10,000 contribution, and then turn around and distribute the $10,000 from the account to make the tuition payment for their kids.
New York Does Not Allow K – 12 Distributions
States are not required to adhere to the income tax rules set forth by the federal government. In other words, states may choose to adopt the new tax rules set forth by the federal government or they can choose to ignore them. The new tax laws that went into effect in 2018 will impact states differently. More specifically, tax payers in states that have both income taxes and high property taxes, like New York and California, may be adversely affected due to the new $10,000 cap (unchanged for 2025) on the ability to fully deduct those expenses on their federal tax return.
As of May 2025, New York does not recognize the K -12 distributions from 529 plans as “qualified”. Currently more than 30 states have announced that they will adhere to the new federal tax rules allowing K-12 qualified distributions from 529 accounts. On the opposite side of that coin, the following states do not recognize K-12 distributions as qualified: California, Illinois, Michigan, Minnesota, Nebraska, New Jersey, New York, Orgeon, and Vermont.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Tax Deductions For College Savings
Did you know that if you are resident of New York State there are tax deductions waiting for you in the form of a college savings account? As a resident of NYS you are allowed to take a NYS tax deduction for contributions to a NYS 529 Plan up to $5,000 for a single filer or $10,000 for married filing joint. These limits are hard dollar thresholds so it
Did you know that if you are resident of New York State there are tax deductions waiting for you in the form of a college savings account? As a resident of NYS you are allowed to take a NYS tax deduction for contributions to a NYS 529 Plan up to $5,000 for a single filer or $10,000 for married filing joint. These limits are hard dollar thresholds so it does not matter how many kids or grandchildren you have.
529 Accounts
529 accounts are one of the most tax efficient ways to save for college. You receive a state income tax deduction for contributions and all of the earnings are withdrawn tax free if used for a qualified education expense. These accounts can only be used for a college degree but they can be used toward an associate’s degree, bachelor’s degree, masters, or doctorate. You can name whoever you want as a beneficiary including yourself. More commonly, we see parents set these accounts up for their children or grandparents for the grandchildren.
Can they go to college in any state?
If you setup a NYS 529 account, the beneficiary can go to college anywhere in the United States. It’s not limited to just colleges in New York. As the owner of the account you can change the beneficiary on the account whenever you choose or close the account at your discretion.
What if they don't go to college?
The question we usually get is “what if they don’t go to college?” If you have a 529 account for a beneficiary that does not end up going to college you have a few choices. You can change the beneficiary listed on the account to another child or even yourself. You can also decide to just liquidate the account and receive a check. If the account is closed and the balance is not used for a qualified college expense then you as the owner receive your contributions back tax and penalty free. However, you will pay ordinary income tax and a 10% penalty on just the earnings portion of the account.
What if my child receives a scholarship?
There is a special withdrawal exception for scholarship awards. They do not want to penalize you because the beneficiary did well in high school or is a star athlete so they allow you to make a withdrawal from the 529 account equal to the amount of the scholarship. You receive your contributions tax free, you pay ordinary income tax on the earnings, but you avoid the 10% penalty for not using the account toward a qualified college expense.
Don't make this mistake.............
We often see individuals making the mistake of setting up a 529 account in another state because “their advisor told them to do so”. You are completely missing out on a good size NYS tax deduction because you only get credit for NYS 529 contributions. A little-known fact is that you can rollover a 529 with another state into a NYS 529 account and that rollover amount will count toward your $5,000 / $10,000 deduction limit for the year. If a client has $30,000 in a 529 account outside of NYS we typically advise them to roll it over in $10,000 pieces over a three year period to maximize the $10,000 per year NYS tax deduction.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
