For various reasons and after careful thought, I have decided to close down a NY State 529 plan account I have for my child. I have been funding it from 2008 to 2021 for the full amount ($10,000) each year to benefit from the NY state tax deduction (married filing jointly).
Having taken these tax deductions, I do understand that NY State will recover ("recapture") any tax benefits I've received for these deductions from this non-qualified withdrawal as well as tax me on the earnings.
I am using TurboTax 2023 to do a WHAT IF calculation pretending that I withdrew the following amount in 2023.
Amount withdrawn: $26,000
Earnings: $4,000
Basis: $22,000
The Federal portion of the calculation is easy to follow. The earnings of $4000 is added to my income and there is an added penalty of 10% on this.
However, I am having difficulty understanding the NY State calculation shown by TurboTax. I'll use the line numbers of the NY State tax form IT-201 to explain my confusion.
New York additions:
Line 22 (NY 529 college savings plan distribution): $26,000
NY subtractions
Line 30 (NY 529 college savings program deductions/earnings): $4,000
I think I understand Line 30, the NY subtraction from the carried-over Federal income. This removes from NY income the part that was already brought over from the Federal return, which includes this amount as addition to federal income. To have retained it would tax me twice on the same amount. Is my understanding of the Line 30 entry correct?
However, I don't understand Line 22, the NY addition. Why I am being taxed for the full amount withdrawn - is the basis (principal) also being taxed by NY State?
I should mention that I looked at the TT generated NY 529 College Savings Program Worksheet (which is used to populate line 22) and entered in Part II, line 3a $190,000/- as my total contributions to the 529 program from 2008 to 2021, and for which I took a NYS deduction each of those years. I did NOT have ANY non-qualified withdrawals in that period. (This will be my first and only non-qualified withdrawal.)
Please can someone explain the logic used in the worksheet to populate line 22?
Many thanks in advance.
