Is a New York resident's distribution from an out-of-state 529 college savings plan subject to New York State personal income tax if it's used for qualified tuition expenses?

Plain-English summary

Bryan Koshers, a New York State resident, opened a 529 college savings plan offered by another state on January 1, 2005, and contributed to it. Because the contribution was never subtracted from his federal adjusted gross income for New York personal income tax purposes, he asked the Department whether a later distribution from that plan would be taxed by New York.

In 2007, Koshers received a distribution from the plan consisting of both a return of his original contribution and accumulated earnings. He used the entire distribution for college tuition expenses, which made it a "qualified withdrawal" under IRC § 529(c) - meaning none of it was subject to federal income tax.

The Department explained that New York adjusted gross income starts with federal adjusted gross income under Tax Law § 612(a), and is then adjusted only for the specific add-backs and subtractions listed in Tax Law § 612(b) and (c). Neither subsection contains any modification that applies to a distribution from an out-of-state qualified tuition program. Since the distribution was already excluded from federal adjusted gross income (as a qualified withdrawal under IRC § 529(c)), and no New York modification required adding it back in, the Department concluded the entire distribution - contribution and earnings alike - was not included in Koshers's New York adjusted gross income and was not subject to New York personal income tax.

What this means for you

New York residents with out-of-state 529 plans

If you're a New York resident who contributed to a 529 college savings plan sponsored by another state (rather than New York's own plan), and you later take a qualified distribution used for higher education expenses, that distribution isn't automatically taxed by New York just because the account isn't a New York plan. Because New York's income tax base starts from your federal adjusted gross income, a distribution that's tax-free at the federal level under IRC § 529(c) generally stays tax-free for New York purposes too, since Tax Law § 612 has no provision requiring it to be added back.

Accountants and tax professionals

When a client asks whether an out-of-state 529 distribution is New York taxable, check first whether the withdrawal qualifies as tax-free at the federal level (i.e., used for qualified higher education expenses under IRC § 529(c)). If it does, and no Tax Law § 612(b) or (c) modification applies, the distribution - including earnings - passes through untaxed to New York adjusted gross income. This is unlike the treatment of the original contribution, which was not deductible for New York purposes in the year it was made.

Common questions

Q: Does it matter that the 529 plan was sponsored by a state other than New York?
A: No. The Department's analysis turned on whether the distribution was includible in federal adjusted gross income and whether any Tax Law § 612 modification applied - not on which state sponsored the plan.

Q: Why wasn't the distribution taxed by New York?
A: Because it was a qualified withdrawal under IRC § 529(c) used entirely for college tuition expenses, none of it was included in federal adjusted gross income. Since New York adjusted gross income starts from federal adjusted gross income (Tax Law § 612(a)) and no modification in § 612(b) or (c) requires adding a 529 distribution back, it remained untaxed for New York purposes as well.

Q: Does this include both the returned contribution and the earnings?
A: Yes. The Department's opinion states the entire distribution, "including the earnings," was not included in New York adjusted gross income.

Q: What if the distribution isn't used entirely for qualified higher education expenses?
A: The ruling doesn't address that scenario - Koshers's facts stated the entire distribution was used for college tuition expenses and was fully excluded from federal tax as a qualified withdrawal, and the opinion is limited to those facts.

Citations and references

• Tax Law § 612(a) - New York adjusted gross income of a resident is federal adjusted gross income, subject to modifications
• Tax Law § 612(b) - modifications increasing federal adjusted gross income (none apply to an out-of-state 529 distribution)
• Tax Law § 612(c) - modifications reducing federal adjusted gross income (none apply to an out-of-state 529 distribution)
• IRC § 529(b) - definition of a "qualified tuition program"
• IRC § 529(c) - distributions used for qualified higher education expenses are excluded from federal gross income

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2007.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a07_6i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-07(6)I
Income Tax
November 15, 2007

Office of Tax Policy Analysis
Taxpayer Guidance Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I070813A

On August 13, 2007, a Petition for Advisory Opinion was received from Bryan Koshers,
1094 Merrick Avenue, Merrick, New York 11566.
The issue raised by Petitioner, Bryan Koshers, is whether a distribution received from a
family tuition savings plan established under a qualified tuition program of a state other than
New York and operated under section 529 of the Internal Revenue Code (529 plan) is subject to
New York State personal income tax.
Petitioner submitted the following facts as the basis for this Advisory Opinion.
Petitioner is a resident of New York State. On January 1, 2005, Petitioner opened a 529
plan offered by a state other than New York and made a contribution to the 529 plan. The
contribution was not subtracted from federal adjusted gross income for New York State personal
income taxes.
In 2007, Petitioner received a distribution from the 529 plan representing a return of the
contribution made to the 529 plan and deferred earnings from the 529 plan. The entire
distribution is being used for college tuition expenses. The distribution is considered a qualified
withdrawal for federal income tax purposes, and no amount will be subject to federal personal
income tax.
Applicable law
Section 529(b) of the Internal Revenue Code (IRC) provides, in part:
Qualified tuition program. For purposes of this section –
(1) In general. The term “qualified tuition program” means a program established
and maintained by a State or agency or instrumentality thereof or by 1 or more eligible
educational institutions –
Section 529(c) of the IRC provides, in part:
Tax treatment of designated beneficiaries and contributors.—
(1) In general. Except as otherwise provided in this subsection, no amount shall
be includible in gross income of –
(A) a designated beneficiary under a qualified tuition program, or

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TSB-A-07(6)I
Income Tax
November 15, 2007

(B) a contributor to such program on behalf of a designated beneficiary, with
respect to any distribution or earnings under such program.
*

*

*

(3) Distributions. –
(A) In general. Any distribution under a qualified tuition program shall be
includible in the gross income of the distributee in the manner as provided under section
72 to the extent not excluded from gross income under any other provision of this
chapter.
(B) Distributions for qualified higher education expenses. For purposes of this
paragraph –
(i) In-kind distributions. No amount shall be includible in gross income under
subparagraph (A) by reason of a distribution which consists of providing a benefit to the
distributee which, if paid for by the distributee, would constitute payment of a qualified
higher education expense.
(ii) Cash distributions. In the case of distributions not described in clause (i), if –
(I) such distributions do not exceed the qualified higher education expenses
(reduced by expenses described in clause (i)), no amount shall be includible in gross
income, and
(II) in any other case, the amount otherwise includible in gross income shall be
reduced by an amount which bears the same ratio to such amount as such expenses bear
to such distributions.
Section 612 of the Tax Law provides, in part:
(a) General. The New York adjusted gross income of a resident individual means
his federal adjusted gross income as defined in the laws of the United States for the
taxable year, with the modifications specified in this section.
(b) Modifications increasing federal adjusted gross income. There shall be added
to federal adjusted gross income:
[None of the modifications required under section 612(b) of the Tax Law are
applicable for a distribution from a family tuition savings plan established under a
qualified tuition program of a state other than New York.]
(c) Modifications reducing federal adjusted gross income.
subtracted from federal adjusted gross income:

There shall be

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TSB-A-07(6)I
Income Tax
November 15, 2007

[None of the modifications required under section 612(c) of the Tax Law are
applicable for a distribution from a family tuition savings plan established under a
qualified tuition program of a state other than New York.]
Opinion
Pursuant to the IRC, 529 plans may be established and maintained by a state, an agency
or instrumentality of a state, or one or more eligible educational institutions of a state that offer a
529 plan. The earnings of a 529 plan are not subject to tax in the year earned and distributions
from a 529 plan, including the earnings, are not included in federal gross income if used for
qualified higher education expenses.
Pursuant to section 612(a) of the Tax Law, the starting point for determining New York
adjusted gross income is federal adjusted gross income. The federal adjusted gross income is
then subject to modifications pursuant to section 612 of the Tax Law. There is no modification
required under section 612 of the Tax Law for a distribution from a family tuition savings plan
established under a qualified tuition program of a state other than New York.
Petitioner states in the present case the entire distribution from the 529 plan is being used
for college tuition expenses and that no amount of the distribution will be subject to federal
income tax. Accordingly, since there is no modification required under section 612 of the Tax
Law, Petitioner’s 529 plan distribution, including the earnings, received from a qualified tuition
savings plan established in a state other than New York is not included in New York adjusted
gross income and is not subject to New York personal income tax.

DATED: November 15, 2007

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Taxpayer Guidance Division

An Advisory Opinion is issued at the request of a person or entity. It is
limited to the facts set forth therein and is binding on the Department only
with respect to the person or entity to whom it is issued and only if the
person or entity fully and accurately describes all relevant facts. An
Advisory Opinion is based on the law, regulations, and Department
policies in effect as of the date the Opinion is issued or for the specific
time period at issue in the Opinion.