Tax Benefits for NY Residents Using a 529 Plan:
The state of New York offers a substantial tax deduction for residents who contribute to the New York Section 529 Direct Plan. For 2008, single taxpayers can deduct up to $5,000 in contributions to New York’s Direct Plan ($10,000 for couples filing jointly).
Increasing the attractiveness of New York’s Section 529 Direct Plan is the fact that residents do not need to itemize their other deductions to claim this benefit. 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 New York Section 529 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 Section 529 Tax Deduction:
If you are a New York resident trying to choose between the Direct Plan Section 529 Plan and other savings vehicles, you need to account for the potential tax savings of the New York deduction for residents. Remember, New York residents only receive a deduction for contributing to New York’s Section 529 Direct Plan, not for plans from other states.
Considering that the top income tax bracket for New York residents is 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% bonus on the amount contributed.
Reference and Documentation:
Parents, grandparents, and other tax payers who want to take advantage of New York's 529 College Savings Program Direct Plan can get a full overview and additional documentation from both the New York State Tax Department and the New York Section Section 529 Direct Plan websites.