Can I withdraw funds, state tax free from a New York 529 fund? If not, how do I calculate the tax and what turbo tax product should I use?

[lysaght8225]

tax and penalties?

[LenaH]

It depends. You can withdraw funds from a NYS 529 plan for any reason, but whether or not it is taxable depends on whether the withdrawal was qualified or nonqualified.

If you withdraw funds to pay for qualified higher education expenses (such as tuition, room and board, fees, books, supplies, computers and equipment), you do not have to pay taxes on the distribution.

Most other withdrawals would be considered nonqualified. The earnings on a nonqualified withdrawal are treated as taxable income and in most cases, an additional 10% penalty will apply on your federal tax return. 

TurboTax will calculate the tax and penalty, if it is applicable in your situation.

You can use TurboTax Deluxe, Premier or Self-Employed for Form 5329 that is needed to complete your tax return. If you would like a CD/download product, you can use TurboTax Basic, Deluxe, Premier or Home & Business. 

[lysaght8225]

I want to us the turbo tax program to estimate my withdrawal of funds from the ny 529 fund for high school tuition. The page that asks for a listing of contribution and withdrawals is confusing and  not user friendly. This section needs a  filled out example. This is what I need. federal tax for tuition payments for high school tuition is not taxed but the state is. the penalty is on the federal or state return.

[LenaH]

There is no 10% state penalty on withdrawal of nonqualified 529 plans under NYS. However, nonqualified withdrawals are subject to NYS income taxes. 

Federal law allows 529 plan account owners to withdraw assets to pay for expenses for high school tuition up to $10,000 per year, per beneficiary. Any amount above $10,000 is subject to penalty and additional income tax.

Under New York State Law, any distributions for K–12 tuition are considered nonqualified distributions, resulting in the tax on earnings. However, there is no penalty at the state level.

To get to this screen on your NYS return in TurboTax, please follow these steps:

1. Open your tax return.
2. Click State on the left side.
3. Continue through your state interview until you get to Changes to Federal Income.
4. Click Start next to New York 529 college savings account activity under Education Adjustments. 
5. Enter contributions, if any were made in 2020.
6. Answer yes to the question Any New York Non-Qualified 529 Withdrawals. 
7. Enter your nonqualified withdrawals.
8. Enter your total contributions for all years. 
9. Fill in any other 529 withdrawals for previous years.