Important Update for New York State Parents Re: 529 Education Savings Accounts and K-12 Expenses

Posted on January 18, 2018 In Family Friendly Tax Policy

As you may already be aware from our earlier FAQs, the newly enacted federal tax law contains a provision that the Orthodox Union Advocacy Center promoted – the expansion of 529 Savings Accounts to be utilized for K-12 education expenses, including those of non-public parochial schools.

There is important new information on this matter for families in New York State.

As we described in the FAQs:

Does the federal tax law change to include K-12 expenses mean that states will provide the state tax deduction for 529 funds used for that purpose?

The answer to this important question varies by state and is one you should discuss with your personal financial adviser. Some state tax laws or regulations are written in a manner that automatically adopts the federal tax law’s definition of which expenses are eligible for 529 accounts’ use, while other states’ laws will require modification. OU Advocacy and its affiliated TEACH Network are already working in key state capitals to ensure the state tax deduction is available (and, ideally, increased) to benefit our community.

On January 17, the New York State Department of Taxation and Finance issued a preliminary report on various aspects of the new federal tax law. Within that report, the Dept. of Tax & Finance states “it appears that distributions [of 529 funds] for K-12 tuition expenses would not be considered qualified distributions under…New York statutes.” Accordingly, any New York State tax benefits would be recaptured at the time a distribution is made from a NY 529 account to fund K-12 expenses (i.e.: the NY tax deduction and any earnings on contributions would be subject to NY tax).

The memo further says the Dept. of Tax & Finance “will continue to review the federal law’s provisions on 529 plans….and welcome discussion for possible solutions and alternatives.”

OU Advocacy and its affiliated TEACH NYS project are exploring the best strategies to engage with Albany (and federal) policymakers on this matter.

In the interim, we advise you to consult with your personal accountant or financial adviser before investing funds in a 529 account that you must withdraw for your children’s K-12 expenses.