Saturday, April 15, 2017

New York free tuition – What to do if you’re at or near the income cap?

This short post is a complement to a recent post in regards to whether you should decline free tuition from New York state.  In this post, I plan to explore the situation where you would like to partake in New York’s free tuition but have some concerns because you are at or near the income cap to be eligible for the program. Please let me stress and provide the disclaimer that this tuition program is new so the thoughts presented here are based on my understanding of the very limited information that is available thus far. I assume no liability for any financial decisions you may take and encourage you to independently research, verify and consult as needed.

The closest that I found in regards to how a family’s income is to be evaluated is from CNN, which stated that it will be “based on the adjusted gross income reported on the family's most recent tax return.” If this is the case, then your adjusted gross income for the Fall of 2017 (and likely Spring 2018) is already a done deal and will be based off of the 2016 tax filing so the tips provided here will not apply to the first year of the program.

Since, this tuition program is specific to New York state residents I am also presuming that the “adjusted gross income” (AGI) will be based on what is identified in the New York state income tax filing (not the Federal).  One big difference here is that the computation of the New York adjusted income subtracts contributions to a 529 (I believe up to $10,000).  One may ask, “if I’m shooting for free tuition, why would I want to contribute to a 529?” Well, quite simply, you can cover things like room and board from your 529 so this may be a good opportunity to lower your AGI (and your NY state income tax) by putting money aside for something that you will need to pay.

A second thought that I had in regards to reducing your AGI is to maximize use of any tax deferred retirement opportunities.  Sorry folks, a Roth will not reduce your AGI (as Roth funds are taxed now, tax free later).  Currently, traditional 401k contributions are limited to $18,000 (plus $6,000 catch up if you’re over 50).  This is a quick and easy way to reduce your AGI by $18,000 - $24,000.  Also, check to see if your spouse is eligible for additional reductions to your family’s AGI.

A third area to explore in your quest to reduce your AGI is to carefully consider your medical options.  If you obtain health insurance through your employer, it may be time to re-evaluate your choices. (In this case, I am presuming that your insurance premiums are taken before taxes so that the AGI that you are taxed on is lower). If you’ve skimped on your coverage, it might be worthwhile to reconsider whether you should pay more for a better plan OR maybe add dental or eye plans if that is an option.  Also consider Flexible Spending Accounts (or Health Savings if you have a High Deductible Health Plan).  Generally, the more you spend on medical through your employer, the lower your AGI will be.

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