20 Jun Can I take a deduction for my 529 plan contributions?

Q. I earn income from New York and live in New Jersey, so I pay both New York and NewJersey taxes. Can I take a deduction from New York income against my 529 plan?
— Taxpayer

A. We’re glad to hear you’re saving in a 529 plan.

It’s hard to beat the tax advantages when it comes to saving for college.

The answer to your question is “sort of,” said Neil Becourtney, a certified public accountant and tax director with Smolin, Lupin & Co. in Red Bank.

Each state has its own 529 college tuition savings program. In New York, it is known as “NY 529 Direct Plan.”

If a taxpayer contributes to the New York plan, they are entitled to a deduction annually of $5,000 if single and $10,000 if a joint filer for contributions made, Becourtney said.

“For a nonresident taxpayer such as yourself, the deduction would be against your `everywhere’ income used to calculate your base tax as though a New York resident taxpayer,” Becourtney said. “The base tax then gets multiplied by the ratio of New York gross income to total gross income to arrive at New York nonresident tax”

No deduction is allowed for a contribution to any 529 plan operated by another state, he said.

“While this deduction might lower your New York nonresident tax slightly, you might not truly benefit as your New Jersey resident credit for New York nonresident tax might decrease by a corresponding amount as the credit cannot exceed the tax incurred in the nonresident state,” he said.

So you might be better off choosing a 529 plan in another state, including New Jersey, which offers the NJBEST plan, he said.

Beginning in 2022, for taxpayers with gross income below $200,000 were allowed a New Jersey deduction of $10,000 for annual NJBEST contributions.

“If most of your New Jersey tax is being offset by the credit for New York nonresident tax, then this may not provide much of an economic benefit,” he said. “If the student attends a New Jersey college or university, NJBEST offers a scholarship of up to $3,000 depending on how long the plan has been open.”

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This story was originally published on June 20, 2023.

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