@dyons I can't see how you completed the NYS worksheet, but let me try and explain this way.
1) You were able to deduct $10,000 per year from your NYS tax return for contributions to the 529 plan. That occurred under the presumption that eventually that money would be used for your child's college education.
2) to the extent that you did indeed use the money for college education, there was no tax to be paid (federal or state) when you withdrew the money from the 529 plan.
3) but when you withdraw the money for non-educational purposes, which is what you state occurred, what was tax deductible (the $10,000 per year) now is reversed and is taxable to you.
4) You withdrew $26,000 of which $4000 was the earning component. Federal tax return shows that and that carries to Line 16 on the State Return.
5) now we have to deal with the remaining $22,000. You got the benefit of $10,000 per year as a deduction in return for the promise that the money would eventually be used for college education. Since that promise was compromised, NY State is simply reversing the benefit and saying, you took $22,000 in deductions years ago, well, now that is being reversed and it is $22,000 of income. It is presented as an ADD of $26,000 on Line 22 and then a SUBTRACT of $4,000 on Line 30, the net being the $22,000.
6) Showing the $22,000 as income to you is the 'clawback' for the deduction you took years ago.
7) NYS is showing this in 3 pieces but if you add it all together it is correct: $4,000 ADDED on Line 16, $4000 SUBTRACTED on Line 30 and then $26,000 ADDED on line 22; the net of all three is $26,000 which is what you withdrew from the 529 plan - it is all taxable in NYS to you.
does that help?
