New York College Savings Program Offers Tax Benefits

By Abraham Weintraub, CPA

New York state has established a college savings program that takes advantage of section 529 of the 1997 tax act, which included a benefit to allow states to establish college savings accounts for taxpayers with any amount of income.

CPAs will find this program a useful college planning device for all clients. High-income clients, who qualify for few tax incentives for financing their children's tuition, will benefit especially.

While the federal government provides many tuition savings plans through tax deductions and credits, including the Hope Scholarship, Lifetime Learning credit, and the Education IRA, these programs phase out at various income levels, most between $80,000 and $100,000 of adjusted gross income for joint returns. Section 529, however, created programs to help eliminate these income restrictions.

Section 529 programs allow individuals to make cash contributions for a designated beneficiary to an investment fund that accumulates until needed to pay tuition and other higher education expenses, including room and board for full-time students. The contribution is a gift and is eligible for the annual tax exclusion. The federal government taxes the earnings at the student's rate when the money is withdrawn; New York does not tax withdrawals if used to pay for educational expenses. Account holders cannot direct the investments made by the fund.

Under the New York college savings plan, individuals can open an account by completing the application and making an initial deposit (in some cases as little as $25 in monthly installments will qualify). Taxpayers can deduct the first $5,000 ($10,000 for joint returns) invested each year from their New York state income taxes, and the state will not tax the earnings if used for higher education anywhere in the United States.

Individuals must have established the account for 36 months before they can withdraw money penalty-free to pay for college. They cannot contribute to an Education IRA the same year they contribute to this program, without triggering a 6 percent penalty. There is a lifetime maximum contribution limit of $100,000 per beneficiary. If the beneficiary decides not to go to college, a different family member can substitute as the new designated beneficiary.

The New York State comptroller's office will administer the New York program, and a subsidiary of TIAA-CREF will manage the fund. Additional states offer similar programs with other investment managers. (New Hampshire, for example, has an agreement with Fidelity Investments).

For more information on New York's program, including an enrollment packet, call (877) NYSAVES or visit its website, www.nysaves.org. *

Abraham Weintraub is a member of the Society's Computers in Tax Practice and Relations with the IRS committees, and a tax manager with Bloom Hochberg & Co. PC.