The state of Arkansas allows residents who contribute money to the Arkansas Tax-Deferred Tuition Savings Program, a Section 529 plan also known as GIFT, to take a tax deduction for contributions of up to $5,000 per taxpayer per year. In other words, a parent of one child could receive a maximum deduction of $5,000. A married husband and wife could receive a maximum deduction of $10,000 at tax time.
Qualified withdrawals from other states’ Section 529 plans don't have to be included as income on an Arkansas resident's state income tax returns.
What Is a 529 Plan?
A 529 plan is a flexible, tax-advantaged college savings plan that's sponsored by a given state, and all 50 states have at least one version. The reason they're considered tax-advantaged is that you're not taxed at the federal level on the growth of the money you contribute to the plan, and most states don't tax the growth either. Of course, there's one small catch. The funds must be used for qualified educational purposes at the elementary through high school levels (or for college-level and beyond) when you make withdrawals.
Otherwise, you'll not only pay income tax on the growth, but you might be subject to a 10% tax penalty as well, although the penalty is typically only on the growth portion of the account, not on your initial investment.
When using funds from your 529 plan at the college or graduate level, these savings accounts can be used to finance tuition fees, school supplies, books, and housing costs (for full-time students) at qualifying academic institutions.
It's important to note that persons who intend to invest in these kinds of state plans must be a U.S. resident who is 18 years of age or older.
There Is No Deduction for Tuition
Unfortunately, there is no deduction for actually paying college tuition as opposed to contributing to the Arkansas Section 529 plan, at least not without a bit of creativity.
Technically, you could make a deductible contribution to the Arkansas Section 529 plan for your college student and have it distributed to the school the very next day. This would effectively allow you to take the deduction.
The Value of the Arkansas Section 529 Tax Deduction
If you're an Arkansas resident trying to decide whether it's a good idea to use the Arkansas Section 529 plan provisions, remember to account for the potential tax savings of contributions to the GIFT plan.
Contributions to other states’ plans don't earn you a deduction, even though you're not taxed on the withdrawals either.
Considering that the top income tax bracket in Arkansas is 6.6%, a $10,000 contribution to a state plan can save you up to $660 at tax time. The deduction is a 6.6% bonus right away.
Claiming the Deduction
The deduction is actually considered an “adjustment to income,” meaning you don't have to itemize to take advantage of it. You can claim it on line 24 of the state income tax form for full-year residents, but you must first complete Form AR1000ADJ, the Schedule of Adjustments, and attach it to your tax return.