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New Yorkers: Don't Miss Out on These 3 Tax Breaks

By Matthew Frankel, CFP® – Nov 12, 2016 at 7:03AM

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If you paid for child care, tuition, or saved for education expenses, you could take advantage of these tax breaks.

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New York State isn't exactly a low-tax state, with tax brackets ranging from 4% to 8.82%. In addition, residents of New York City pay an additional rate of 2.907% to 3.876%, depending on their income. Fortunately, there are some lucrative tax breaks available to New York residents, especially when it comes to child care and education. Here are three that you don't want to miss.

Additional child care benefits

New York offers a Child and Dependent Care Credit that is in addition to the federal credit of the same name. It can be claimed whether or not you also claimed the federal credit, and is worth from 20% to 110% of the value of the federal credit, depending on your New York State adjusted gross income (AGI). This means that depending on your income, the credit can potentially be worth up to $2,310, and it is refundable, meaning that you can get it even if the credit is more than your tax liability.

Qualifications for the state credit are the same as for the federal version. The child who received the care must be under 13, and must have lived with the person claiming the credit for more than six months. And the care must have been provided so that you (and your spouse, if applicable) could work or look for work. If you didn't have a job, and therefore have no earned income for the year, you can't take the credit.

Furthermore, New York City offers yet another child and dependent care credit worth up to $1,733 for lower-income families with children under four years old, so that's also worth checking out if you might meet the criteria.

A double tax benefit for college savings

An excellent way for Americans to save for college expenses is a 529 savings plan. And as I've written before, these plans work like a Roth IRA in the sense that contributions are not deductible on the federal level, but any qualified withdrawals are tax-free.

Some states offer additional tax incentives for 529 savers, and New York happens to be one of them. If you set aside money for a child's education, New York's 529 College Savings Program allows contributors to deduct up to $5,000 in qualified contributions per year ($10,000 for married couples) from their New York state income. So, contributors effectively get a double tax benefit -- a deduction for contributing, and then another tax break when they withdraw the money to pay for education.

With a maximum account balance of $375,000 per beneficiary, this plan could result in some pretty big tax savings over the years.

New York's 529 plan has some rather attractive features in addition to the tax benefits. For starters, its investment options, which consist of Vanguard mutual funds, charge a total expense ratio of just 0.16%, among the lowest overall expense ratio available with any 529. Also, the value of the 529 account is excluded when calculating eligibility for state financial aid.

Did you pay tuition this year?

In addition to the 529 tax breaks, New York also offers a tax credit of up to $400 or itemized deduction of up to $10,000 when you pay tuition, even if the funds came from a 529 plan or another tax-advantaged savings program.

The credit is available to all full-year New York State residents who paid college tuition expenses during the tax year, and it is refundable. In other words, even if your New York State income tax is less than $400, and you're entitled to the maximum credit amount, you can still claim it. For taxpayers with tuition expenses of $5,000 or more, the credit is equal to 4% of the qualified expenses, up to a maximum of $10,000. If your college tuition expenses were less than $5,000, the credit is $200 or your actual expenses, whichever is less.

On the other hand, the itemized deduction is income-restricted. If your New York adjusted gross income is greater than $525,000 but less than $1,000,000, you can claim 50% of the deduction, and if your AGI exceeds $1 million, you are not entitled to the itemized deduction.

It's important to point out that this tax break is just for qualified higher education tuition, not expenses such as room, board, books, and required equipment. And the tuition must be for undergraduate courses. Any coursework intended to lead to a graduate degree is not eligible.

Here is a worksheet that can help you figure out if the credit or deduction would be more advantageous to you, and how much of a benefit you could get.

The bottom line

New York state is rather tax-friendly when it comes to child care and education, so take advantage. For example, if you have been saving for your child's education in another type of account, it may be worth considering New York's 529. Be sure to save all your child care and tuition documentation to be sure that you get every penny you're entitled to.

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